UNIVERSITY OF MUMBAI

NAGINDAS KHANDWALA COLLEGE OF

COMMERCE AND ARTS

PROJECT REPORT ON
MERCHANT BANKING IN INDIA

SUBMITTED BY
AVANI BIPIN SONI

T.Y.BCOM (FINANCIAL MARKET)

SEMESTER V

PROJECT GUIDE
PROF. POONAM SHAH

ACADEMIC YEAR 2015-2016

[1]

ACKNOWLEDGEMENT
The completion of any project depends upon the co-operation, co-ordination and combined work of
several resources of knowledge, inspiration and energy.
Every opportunity should be made the most of and so I would like to take this opportunity to thank
all those individuals who have helped me in preparing this project.
I express my deep sense of gratitude to My Guide Prof. Poonam Shah for her valuable guidance
during my project work.
I am also thankful to all those seen and unseen hands and head, which have been of direct or indirect
help in the completion of this project.

[2]

INDEX OF THE PROJECT

SR.N
O.

CONTENT

Introduction
Executive Summary
Objective
Research Methodology

Introduction
Merchant Banking
History
Emergence of merchant bank in India
Scope of merchant banking in India

Importance
Need of Merchant Banking
Structure of Merchant Banks in India
Commercial bank & merchant bank
Investment bank & merchant bank
Functions of merchant banks

Merchant Bankers
Role of merchant bankers
Registration
Qualities
Responsibilities
Problems

Merchant banking services

Scope
Types of Services
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PG
NO.

Merchant banking players

Merchant banking organization
Case study of merchant banks

Current scenario
Recent trends in merchant banks

Conclusion

Annexure

1o

Bibliography

[4]

CHAPTER 1 INTRODUCTION

1.1 EXECUTIVE SUMMARY

This project has given an overview about the importance and the role of merchant bankers in the
growth of financial markets. The project covers how the merchant banks works, rules & regulations
laid by SEBI & its impact on the merchant banking activities. The project shows the emergence of
merchant banking in India from its beginning to its current scenario.
Importance of merchant banking in the economy is expected to grow even further in the coming
years with an increasing proportion of investments in the financial market hence, my project covers
the challenges and advantages, which India will get and is getting by merchant banking activities.
The project has covered several services provided by Merchant Bankers & the role of Merchant
bankers in providing those services to the business world.
This project covers the different aspects of the merchant banking services provider that is the
merchant banker. This project covers various responsibilities of merchant bankers, their role,
qualities, and registration with SEBI
There are various banks which provide the services of merchant banking these can be foreign player
or domestic player in this project there are case studies on 4 players which provide the service of
merchant banking
Finally, the top players, which exist in merchant banking, are also covered; their services are also
been focused.

[5]

1.2 OBJECTIVE OF THE PROJECT

The main purpose to choose Merchant banking as the project topic was due to increase in
demand of investment banks or merchant banks in the market
between the investors and other market players.

To understand about the importance of Merchant banks in the market and also to know about
the difference between Merchant banks and Commercial banks.

To study about the various services provided by these banks to companies and also to know
about the top merchant banks in market

To know about the responsibilities of the merchant banker towards their clients, to know
about the steps for their registration, their qualities etc.

The objective of project is also to know about the various players who in the market who are
providing the services of merchant banking. The players can be both domestic and foreign
the project gives the detail on 4 players in the market

1.3 RESEARCH METHODOLOGY

The data collected for this project is a secondary data which means the information is collected from
different sources like

Various books related to banking sector of India

Various websites
Newspapers and articles related to merchant banks
Information from presentations related to Merchant banks
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All the data collected for this project is true and relevant in all the aspects.

CHAPTER 2- INTRODUCTION TO MERCHANT BANK

A Merchant Bank is a financial institution that provides capital to companies in the form of
share ownership instead of loans. A Merchant Bank also provides advisory on corporate
matters to the firms in which they invest.

The term 'merchant banking' has been used differently in different parts of the world. While in U.K.
merchant banking refers to the 'accepting and issuing houses', in U.S.A. it is known as 'investment
banking'. The word merchant banking has been so widely used that sometimes it is applied to banks
who are not merchants, sometimes to merchants who are not banks and sometimes to those
intermediaries who are neither merchants not banks.
In India merchant banking services were started only in 1967 by National Grindlays Bank followed
by Citi Bank in 1970. The State Bank of India was the first Indian Commercial Bank having set up
separate Merchant Banking Division in 1972. In India merchant banks have been primarily operating
as issue houses than full- fledged merchant banks as in other countries.
A merchant bank may be defined as an institution or an organisation which provides a number of
services including management of securities issues, portfolio services, underwriting of capital issues,
insurance, credit syndication, financial advices, project counselling etc. There is a distinction
between a commercial bank and a merchant bank. The merchant banks mainly offer financial
services for a fee. while commercial banks accept deposits and grant loans. The merchant banks do
not act as repositories for savings of the individuals
Like investment banks, merchant banks are intermediaries that provide brokerage, fund raising and
financial advisory services on a large scale to businesses and a smaller scale to wealthy individuals.
Dictionary meaning of merchant bank refers to an organisation that underwrites corporate securities
and advises client on issue like corporate mergers etc involved in the ownership of commercial
ventures. This organisation may be banks, corporate body or firms.

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To illustrate the role of merchant bank, suppose a multinational company XYZ is considering the
purchase of a smaller company in another country. Company XYZ will likely ask for the services of
a merchant bank for advice on how to best approach the acquisition process. In addition, the
merchant bank also finances for the acquisitions of the companies

TRADITIONAL MERCHANT BANKING

Merchant banking as term has evolved in Europe from the 18 th century to today, retained to an
individual or a banking whose primary function was to facilitate the business process between a
product and the financial requirements for its development. Merchant banking services span from the
earliest negotiation from a transaction to its actual consummation between buyer and seller.
In particular the merchant banker acted as a capital sources whose primary activity was directed
towards a commodity trader owner who was involved in buying, selling and shipping of goods. The
role of the merchant banker was to arrange the necessary capital and ensure that the transaction
would ultimately produce profits. The merchant banker also became involved in the actual
negotiation between the buyer and the seller.

MODERN MECRCHANT BANKING

During the 20th century the European merchant banker expanded their services. They became
increasingly involved in actual running of the business for which the transaction was conducted.
Today the merchant banks actually own and run the business for their own account, and that of other
Since the 18th century the term merchant banker has therefore been considerably broadened to
include a composite of modern day skill. Theses skill included those inherent in an entrepreneur, a
management advisor, a investment banker plus that of a transaction broker

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2.2 HISTORY OF MERCHANT BANKING

Merchant banking started in Italy in late medieval times. Reached in France during the seventeenth
century. Italian merchant bankers introduced Merchant banking into England in eighteenth century.
In 1972, merchant banking started in South Africa and in 1967 National Grindlays Bank started
merchant banking in India.
During the seventeenth and most of the eighteenth century international finance was centered on
Amsterdam. Consequently. Amsterdam Merchants became the first masters of the various financial
techniques and developments which, in the course of time, became identified with the emergent
profession of Merchant Bankers
Commercial Banking and Investment Banking are often confused with Merchant Banking. In many
ways, there may be similarities in their functions. However, in certain ways, Merchant Banking is
distinctly different from commercial Banking and Investment Banking.
The primary function of a commercial bank is to receive deposits from the public and lend the same
to others. Commercial Banks can undertake some of the merchant banking activities like Issue
Management whereas Merchant Banking Units can not undertake commercial banking activities.
However, the functions of Merchant Banking may not widely vary from Investment Banking. The
Merchant Banker mainly deals with Issue Management, post issue services, corporate adviser
services etc.
A merchant bank may be considered as an institution which centres its operation on all or most of the
following activities.
Corporate financial advice, on such diverse matters as new share and bond issues, capital
reconstructions, mergers and acquisitions;
The taking of deposits and currency, money market operations including foreign exchange
dealing;
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 Medium-term lending and syndication of loans;

Acceptance credits and all forms of export finance;
The holding and dealing in quoted and unquoted investment; and
Fund management on behalf of clients, most typically pension funds, unit trust, investment
trusts and wealthy individuals.

2.3 EMERGENCE OF MERCHANT BANKS IN INDIA

Till 21st century India had entered into a phase were it had became Asias one of the dynamic
economy. This is the part of the assessment made by International Financial and Capital Market
Institutions based on Indias economic and financial reforms initiated in 1991 and brought to fruition
in various budget.

2.3.1 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. The
need for specialized merchant banking services was felt in India with the rapid growth in the number
and size of the issues made in the primary market.

The merchant banking services were started by foreign banks, namely the National Grindlays Bank
in 1967 and the City Bank in 1970. The Banking Commission in its report in 1972 recommended the
setting up of merchant banking institutions. This marked the beginning of specialized merchant
banking in India.

To begin with, merchant banking services were offered along with other traditional banking services.
In the mid-Eighties, the Banking Regulation Act was amended permitting commercial banks to offer
a wide range of financial services through the subsidy rule.

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The State Bank of India was the first India Bank to set up merchant Banking division in 1972. Later
ICICI set up its Merchant Banking division followed by Bank of India, Bank of Baroda, Canada
Bank, Punjab National Bank and UCO Bank. The merchant banking gained prominence during
1983-84 due to new issue boom.

2.3.2 MERCHANT BANKING| PAST & PRESENT

Many banks entered merchant banking in the 1960s to take advantage of the economies of scope
produced when private equity investing is added to other bank services, particularly commercial
lending. As lenders to small and medium-sized companies, banks become knowledgeable about
individual firms products and prospects and consequently are natural providers of direct private
equity investment to these firms.
As mentioned above, commercial banks were the largest providers of venture capital in the 1960s. In
the middle to late 1980s, the decision to enter merchant banking was thrust on other banks and bank
holding companies by unforeseen events. In those years, as a result of the LDC (less-developedcountry) debt crisis, many banks received private equity from developing nations in return for their
defaulted loans. At that time, many of these banks set up merchant banking subsidiaries to try to get
some value from this private equity.
Also at about that time, most commercial banks began refocusing their private equity investments to
middle-market and public companies (often low-tech, already profitable companies) and, rather than
providing seed capital, financed expansion or changes in capital structure and ownership.
Most particularly, they took equity positions in LBOs, takeovers, or recapitalizations or provided
subordinated debt in the form of bridge loans to facilitate the transaction. Often they did both.
Commercial banks financed much of the LBO activity of the 1980s.Then, in the mid-1990s; major
commercial banks began once again focusing on venture capital, where they had substantial expertise
from their previous exposure to this kind of investment. Some of these recent venture-capital
investments have been spectacularly successful. For example, the Internet search engine Lycos was a
[11]

1998 investment of Chase Manhattans venture-capital arm. Commercial banks are permitted to
report either realized or unrealized gains on their merchant-banking portfolios, as long as they are
consistent in the reporting. This option makes it difficult for one to compare different entities
financial results and could lead to an overly liberal reporting of profits.

2.3.3 SEBI GUIDELINES FOR MERCHANT BANKING

A merchant banker will require authorization by SEBI to carry out the business.
SEBI has classified the merchant bankers into four categories based on the nature and range of the
activities and the responsibilities.

Category I:

It consists of merchant bankers who carry on the business of issue management

which consists of preparation of issue management, preparation of prospectus, determining

the financial structure, tie-up of the financiers and final allotment/refund of subscription and
to act in the capacity of managers, advisors or consultants to an issue, portfolio manager and
underwriter.
Minimum net worth required is Rs. 1 crore.

Category II: It consists of those authorized to act in the capacity of co-manager/advisor,

consultant underwriter to an issue.
The Minimum net worth required is Rs. 50 Lakhs.

Category III: It consists of those authorized to act as underwriter, advisor or consultant to an

issue.
The Minimum net worth required is Rs. 20 Lakhs.

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 Category IV: It consists of Merchant Banker who acts as advisor or consultant to an

issue. There is no Minimum net worth required.

Every merchant banker should maintain copies of balance sheet, Profit and loss account, statement of
financial position
Half-yearly unaudited result should be submitted to SEBI
SEBI has been vested with the power to suspend or cancel the authorization in case of violation of
the guidelines

2.4 SCOPE OF MERCHANT BANKING IN INDIA

In the present dynamic environment where public money is playing a vital role in financing a large
number of projects, both in the public and private sectors, Merchant Banking has a significant role in
managing the show and meeting the growing demands for funds by the corporate sector. Merchant
Banking includes a whole gamut of activities which meet the needs of both corporate and individual
investors and which range from identification, evaluation, promoting and financing of projects (both
domestic and overseas) by raising resources in the equity and long-term loans, to organize and
participate in international consortia, to raise foreign currency loans and to offer advisory services on
various matters related to finance, investment, capital management, structure, mergers,
amalgamation, takeovers and acquisitions.

They also play a useful role in the portfolio management, money market operations, venture capital,
leasing, etc. Merchant bankers act as a guide for the entrepreneurs who are unaware, or have little
knowledge or experience, of the complexities involved in the above spheres.

In addition to the above, the scope of Merchant Banking services has extended to providing advisory
services to companies to increase or divest their stakes, public sector undertaking disinvestments,
international issues, etc. With the OTCEI being operation now, Merchant Bankers will have a key
role to play in terms of appraising the projects and offering two-way quotes for market making in
case of entrepreneur going for listing in the above exchange.

Merchant Bankers act as a critical link between the corporate who are intended to raise funds and the
investors who are interested to invest in securities Industry. Besides issue management, the
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Merchant Bankers are also undertake the activities like underwriting connected with the public issue
management business, Managing/advising on International offerings of Debt/Equity i.e., GDR, ADR,
Bonds and other instruments, Private placement securities, Primary or Satellite dealership of
government securities, Corporate Advisory services related to securities market (e.g., Takeovers,
acquisitions, disengagement), Stock-Broking, Advisory Services for projects, Syndication of rupee
term loans and International Financial Advisory Services.

CHAPTER 3- IMPORTANCE OF MERCHANT BANKING

With an increase in the growth of the financial market, economy, capital market there has been
increase in the amount of investment in the market. In order to meet this growth the financial
institutions have to provide different types of services. So indirectly with an increase in the growth of
economy there is an increase in the importance of the financial institutions.
Importance of Merchant banking has also increased some of the important factors in growth of
importance of merchant banking are as follows

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.

With the growing demand for funds there was pressure on capital market that enthused the
commercial banks, share brokers and financial consultancy firms to enter into the field of
merchant banking and share the growing capital market.

In India have opened their merchant banking windows and are competing in this field, and
also doing advisory functions as merchant bankers as well as managing public issues in
syndication with other merchant bankers.
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 Merchant banks can play highly significant role in mobilizing funds of savers to investible
channels assuring promising return on investments activity.

With the growth of merchant banking profession corporate enterprises in both public and
private, sectors would be able to meet the growing requirements for the funds for establishing
new enterprises, undertaking expansion/modernization/diversification of the existing
enterprises. Merchant banks have been procuring impressive support from capital market for
the corporate sector for financing their projects.

In view of multitude of enactments, rules and regulations, guidelines and offshoot press
release instructions brought out by the Government from time to time imposing statutory
obligations upon the corporate sector to comply with all those requirements prescribed
therein, the need of skilled agency existed which could provide counselling.
Merchant bankers advise the investors of the incentives available in the form of tax reliefs,
other statutory relaxations, good return on investment and capital appreciation in such
investment to motivate them to invest their savings in securities.
Concerns with confidence, safety and organizations for higher yields. Important reason for
the growth of merchant banking is due to exerting excess demand on the sources of funds
forever expanding industry and trade.

Merchant banks have been procuring impressive support from capital market for the
corporate sector for financing their projects.

With all these points we can say that the need and importance of merchant banking is increasing day
by day thus, we can say that as the merchant bankers help industry and trade to raise funds, and the
investors to invest their saved money in sound and healthy the importance of merchant banking has
increased
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3.2 STRUCTURE OF MERCHANT BANKING IN INDIA

MERCHANT
BANKS

PUBLIC
SECTOR

PRIVATE
SECTOR

COMMERCIAL
BANKS (26)

BANKS (10)

FINANCIAL
blblkjbb
INSTITUTION
(6)
STATE
INSTITUTION
(4)

FINANCIAL
INSTITUTION
(231)

INTERNATINAL
BANK (10)

Initially Merchant Bankers were classified into 4 categories with regard to their nature and range of
activities and their responsibilities to SEBI. The requirements are as under: There are four different
categories of merchant bankers. Only category 1 merchant bankers are allowed to act as lead
managers to the issue:

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Category 1: Those merchant bankers who can conduct all above mentioned activities, relating to
management of issues. They may, if they so choose, act only in an advisory capacity or as comanager, underwriter or as portfolio manager.
Category 2: Those merchant bankers who can act as consultant, advisor, portfolio manager and comanager.
Category 3: Those merchant bankers who can act as underwriter, advisor and consultant.
Category 4: Those merchant bankers who can act only as advisor or consultant to an issue. Different
types of organizations in India which provide merchant banking services: i.e. Commercial Banks, All
India Financial Institution, Private Consultancy Firms ,Technical Consultancy Organizations.

3.3 DIFFERENCE BETWEEN COMMERCIAL & MERCHANT BANK

POINTS

COMMERCIAL BANK

MERCHANT BANK

FUNCTIONS

Saving accounts, loans, credit cards, credit

to business, brokerage fees etc

Financial advisory, consultant,

HOW THEY
MAKE MONEY

By providing small business & home

loans, issuing mortgage

Profit from the fees they charge to

the customers by providing
services

EFFECTS ON
ECONOMY

Provides money for loans and also for

expansion of business

Provides money to large

corporations

INVESTMENTS

Cannot buy securities more than 5% of net

incremental deposits of previous years

No such investment regulations on

merchant banks

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ORIENTED

Are asset oriented and their lending

decisions are based on detailed credit
analysis of loan proposals and the value of
security offered against loans. They
generally avoid risks.

Unlike the commercial banks

merchant banks are management
oriented. They generally are willing
to accept risks of business.

DEALINGS

Basically deal in debt related finance and

their activities are appropriately arrayed
around credit proposals, credit appraisal
and loan sanctions

Basically they deal with mainly

funds raised through money market
and capital market and the area of
activity is equity and equity
related finance.

3.4 DIFFERENCE BETWEEN INVESTMENT & MERCHANT BANK

POINTS

INVESTMENT BANK

MERCHANT BANK

FUNCTIONS

Traditional investment banks were engaged

in the underwriting of shares and issuance
of shares

Merchant banks are well known

in international financial
activities.

MERGERS &
ACQUISITION

Investment banks assist companies in the

acquisition and merges

Traditional Merchant banks not

assist companies in the Merger
and acquisitions

SCALE

Investment banks emphasis mainly on large

scale private and public companies

Merchant banks mainly provide

services to small scale
companies.

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INITIAL PUBLIC
OFFERING

Investment banks focus on initial public

offerings (IPOs) and large public and
private share offerings.

Merchant banks tend to operate

on small-scale companies by
providing those cash for
operations activities before IPOs
also called as bridge financing.

IN SHORT

Investment Banks involve in research,

mergers and acquisitions, sales and
trading, underwriting, restructuring.

Merchant Banks involve in

project promotion, venture
capital , syndication of loans,
corporate counselling.

EXAMPLE

Examples for investment banks can be

Morgan Stanley, JP Morgan,

Examples for merchant bank can

be Kotak securities, citigroup etc

3.5 FUNCTIONS OF MERCHANT BANKS

Raising finance for clients

Broker in Stock Exchange
Services to Public Sector Units
Corporate restructuring
Money Market Operations
Management of interest and dividend

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 Raising funds for clients

Merchant Banking helps its clients to raise finance through issue of shares, debentures, bank loans,
etc. It helps its clients to raise finance from the domestic and international market. This finance is
used for starting a new business or project for modernization or expansion of the business

Brokers in stock market

Merchant bankers act as brokers in the stock exchange. They buy and sell shares on behalf of their
clients. They conduct research on equity shares. They also advise their clients about which shares to
buy, when to buy, how much to buy and when to sell. Large brokers, Mutual Funds,
Venture capital companies and Investment Banks offer merchant banking services.

Services in public sector unit

Merchant banks offer many services to public sector units and public utilities. They help in raising
long-term capital, marketing of securities, foreign collaborations and arranging long-term finance
from term lending institutions

Corporate restructuring
.It includes mergers or acquisitions of existing business units, sale of existing unit or disinvestment.
This requires proper negotiations, preparation of documents and completion of legal formalities.
Merchant bankers offer all these services to their clients.

Money market operations

Merchant bankers deal with and underwrite short-term money market instruments, such as:
Government Bonds.
Certificate of deposit issued by banks and financial institutions.
Commercial paper issued by large corporate firms.
Treasury bills issued by the Government
Management of interest and dividend
Merchant bankers help their clients in the management of interest on debentures / loans, and
dividend on shares. They also advise their client about the timing (interim / yearly) and rate of
dividend.

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CHAPTER 4- INTRODUTION TO MERCHANT BANKERS

4.1 ROLE OF MERCHNT BANKERS

The role of merchant banker is dynamic in the wake of diverse nature of merchant banking services.
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.

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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. He
has to keep pace with the changing environment where Government rules, regulations and policies
affecting business conditions frequently change; where science and technology create new
innovations in production processes of industries envisaging immediate renovations, diversification,
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.
Merchant banker has to think and devise new instruments of financing industrial projects. He has to
assume wider responsibilities of saving industrial units from going sick and guiding industries to be
set up industrially backward areas to eliminate regional imbalances in industrial development of the
country.
He has to guide the wider section of the community possessing surplus money to invest in corporate
securities and other productive investment channels. He has to help the industry in different forms to
ensure that it runs risk free and devoid of uncertainty by assisting the 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.
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. For this reason, a merchant
banker is sometimes, called M.B i.e. Moving Bottom, i.e., one who never sits at one place, always
moving- attending meetings and meeting clients and constituents, doing business and getting
business by attending meetings and conferences, imparting knowledge to others and acquiring new
knowledge to maintain his supremacy in possession of latest information. His role depicts a
personality cult, which is unique and envious to be followed by others.
In the days ahead, merchant bankers have very significant role to play tuning their activities to the
requirements of the growth pattern of 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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4.1.2 ROLE OF MERCHANT BANKERS IN MARKET

The Securities and Exchange Board of India (SEBI) has stated that merchant bankers must be
involved more closely in the market making process as share brokers do not have the requisite
expertise to evaluate the fundamentals of the scrips before taking over the role of market makers.
Further, share brokers generally being partnership; firms do not have the financial clout which is
necessary for market making activity. Resultantly, the SEBI has suggested that any member of the
stock exchange along with one merchant banker registered with SEBI could act as a market maker.
The SEBI has felt that to ensure liquidity of scrip it was necessary to facilitate greater movement,
which could only be achieved through the institution of market makers. Market makers would also
create a market for the scrips by offering two way quotes to the investors. A minimum of ten scrips
has been proposed by SEBI for the market makers.

4.1.3 ROLE OF MERCHANT BANKER IN PUBLIC ISSUE

In issue management, the main role of merchant bankers is to help the company issuing securities in
raising funds for the purpose of financing new projects, expansion/ modernization/ diversification of
existing units and augmenting long term resources for working capital requirements. The most
important aspect of merchant banking business is to function as lead managers to the issue
management. The role of the merchant banker as an issue manager can be studied from the following
points:

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1. Easy fund raising: An issue manager acts as an indispensable pilot facilitating a public/ rights
issue. This is made possible with the help of special skills possessed by him to execute the
management of issues.
2. Financial consultant: An issue manager essentially acts as a financial architect, by providing
advice relating to capital structuring, capital gearing and financial planning for the company.
3. Underwriting: An issue manager allows for underwriting the issues of securities made by
corporate enterprises. This ensures due subscription of the issue.
4. Due diligence: The issue manager has to comply with SEBI guidelines. The merchant banker will
carry out activities with due diligence and furnish a Due Diligence Certificate to SEBI. The detailed
diligence guidelines that are prescribed by the Association of Merchant Bankers of India (AMBI)
have to be strictly observed. SEBI has also prescribed a code of conduct for merchant bankers.
5. Co-ordination: The issue manger is required to co-ordinate with a large number of institutions and
agencies while managing an issue in order to make it successful.
6. Liaison with SEBI: The issue manager, as a part of merchant banking activities, should register
with SEBI. While managing issues, constant interaction with the SEBI is required by way of filing of
offer documents, etc.

4.2 REGISTRATION OF MERCHANT BANKER

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 or acting as manager,
consultant, adviser or rendering. It is very important to first register yourself with SEBI in order to
start the business. The following are the steps to register with SEBI.
APPLICATION FOR GRANT OF PERMISSION
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FURNISHING OF INFORMATION,
CLARIFICATION, REPRESENTATION
REREREPRESENTATION
CONSIDERATION OF APPLICATION
GRANT OF CERTIFICATE

PAYMENT OF FEES AND CONSEQUENCES

OF FAILURE TO PAY FEES

The applicant should be a body corporate it should have a minimum net worth of Rs.5
crore
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.
The applicant must have at least two employees with prior experience in merchant
banking
Any associate company, group company, subsidiary or interconnected company of the
applicant should not have been a registered merchant banker
The applicant should not have been involved in any securities scam or proved guilt for
any offence

4.3 QUALITIES OF MERCHANT BANKER

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:-

LEADERSHIP
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Merchant banker should possess all relevant skills, update knowledge to interact with the clients and
effectively communicate. Leadership is synonymous with followers who follow the one who leads.

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.

COOPERATION AND FRIENDLINESS

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 business merchant banker spreads with
geometrical propagation when he shares the thoughts of his clients with sympathetic gestures and
offers pragmatic suggestions without greed or favours. Very often, rude, intemperate and indifferent
disposition or blunt out burst withdrew fortunate business opportunities forever.

Friendliness and

cooperation must flow as natural traits in the merchant banker to win the trust of the clients.

CONTACTS
Success of 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
[26]

services are availed of in executing merchant banking assignments. Merchant bankers should widen
contacts and references and continue to maintain them with goodness, honour and humour by
meeting people.
ATTITUDE TOWARDS PROBLEM SOLVING
The most important personality trait of a merchant banker is his attitude towards problem solving.
Even client coming to him has got to return fully satisfied having consulted a merchant banker.
Positive approach to understand the view points of others, their difficulties and their adverse
circumstances is possible only when a person is skilled in human relations particularly the interpersonal and intra-personal behaviour. Effective communication and proper feedback are the prerequisite for creating a positive attitude towards problem solving. Many persons are effective in this
trait without any training for reasons of cultivating a habit from environment in which they have
been brought up at home, in school, college and office. This is so important that it must be treated as
a separate objective quality of a good merchant banker.
NEW SKILLS, INFORMATION AND KNOLEDGE
Merchant bankers lice on their 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 possess the quality of inquisitiveness.

[27]

4.4 RESPONSIBILITIES 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
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 ASPECTS
Compliance with the SEBI guidelines and the various guidelines issued by the Ministry of
Finance and Department of Company Affairs. Pending litigations towards tax liabilities or any
criminal/civil prosecution any of the directors for any offenses. Fair and adequate disclosures in the
prospectus.
[28]

 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 Preissue 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.

[29]

4.5 PROBLEMS FACED BY MERCHANT BANKERS

SEBI guidelines have authorized merchant bankers to undertake issue related activity 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.

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.

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.

[30]

CHAPTER 5 SERVICES OF MERCHANT BANKING

MERCHANT BANKING SERVICES: SCOPE

In the present dynamic environment where public money is playing a vital role in financing a large
number of projects, both in the public and private sectors, Merchant Banking has a significant role in
managing the show and meeting the growing demands for funds by the corporate sector. Merchant
Banking includes a whole gamut of activities which meet the needs of both corporate and individual
investors and which range from identification, evaluation, promoting and financing of projects (both
domestic and overseas) by raising resources in the equity and long-term loans, to organize and
participate in international consortia, to raise foreign currency loans and to offer advisory services on
various matters related to finance, investment, capital management, structure, mergers,
amalgamation, takeovers and acquisitions. They also play a useful role in the portfolio management,
money market operations, venture capital, leasing, etc. Merchant bankers act as a guide for the
entrepreneurs who are unaware, or have little knowledge or experience, of the complexities involved
in the above spheres.

In addition to the above, the scope of Merchant Banking services has extended to providing advisory
services to companies to increase or divest their stakes, public sector undertaking disinvestments,
international issues, etc. With the OTCEI being operation now, Merchant Bankers will have a key
role to play in terms of appraising the projects and offering two-way quotes for market making in
case of entrepreneur going for listing in the above exchange.

Merchant Bankers act as a critical link between the corporate who are intend to raise funds and the
investors who are interested to invest in securities Industry. Besides issue management, the
Merchant Bankers are also undertake the activities like underwriting connected with the public issue
management business, Managing/advising on International offerings of Debt/Equity i.e., GDR, ADR,
Bonds and other instruments, Private placement securities, Primary or Satellite dealership of
government securities, Corporate Advisory services related to securities market (e.g., Takeovers,
acquisitions, disengagement), Stock-Broking, Advisory Services for projects, Syndication of rupee
term loans and International Financial Advisory Services. The services can be represented as fol

[31]

MERCHANT BANKING SERVICES

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

ISSUE MANAGEMENT:
The public issue of securities is the core of merchant banking function. At one time it was
constructed as the sole function. Merchant bankers were identified as issue houses. It was later
perceived that they provide other financial services. When companies seek to raise resources for
implementation of a new project or finance expansion or modernization or diversification of an
existing unit or fund long term working capital requirement, they retain the services of a merchant
banker. To a large extent the type of issue would vary with the purpose for which funds are raised.
Merchant bankers when retained as managers to issue will have to assist the company in all the
stages connected with public issue.
The merchant bankers help corporate to raise money from the markets through the issue of shares,
debentures, bonds etc. They are designated as managers to the issue. Their main business is to
attract public money to capital issues.
They usually render the following services:
Drafting of prospectus and getting it approves from the stock exchanges.
Obtaining consent/acknowledgement from SEBI.
Appointing bankers, underwriters, brokers, advertisers, printers etc.
Obtaining the consent of all the agencies involved in the public issue.
These shows are held for the analysts, brokers & institutional investors. The purpose of these shows
is to answer queries from these people about the company and the project for which the funds are
being raised
[32]

 CORPORATE ADVISORY SERVICES RELATING TO THE ISSUE

In India, the pricing of issues is now freely decided by the company, with valuable inputs from the
merchant bankers, who have to sell the issue at the decided price. The pricing of the issue especially
in a public issue is very important. The pricing has to be such that the investors will be attracted to
invest in the issue at that price, at the same time the company should get the premium that it is
looking for. After all, the premium can play a very role in deciding the companys capital structure,
as larger the premium lesser will be the requirement for borrowed funds.
The promoter also needs to decide whether to go in for a fresh issue or to go for a rights issue.
However this will depend mainly on the quantum of funds that the company needs to raise. The
success of the issue is dependent on the selection of the right type of security. In this matter, the
expert advice of merchant bankers is of immense importance.
In the issue management the merchant bankers have to coordinate the various agencies to the issue.
The success of the issue depends on the cooperation of all the agencies involved.
The merchant bankers offer following services during the public issues:
Preparing an action plan and budget for the total expenses for the issue.
Preparation of application to SEBI and assistance in obtaining the consent from SEBI.
Drafting of the prospectus.
Selection of underwriters, Brokers etc.
Selection of bankers to the issue.
Selection of advertising agency for publicity.
Obtaining approval of the institutional underwriters and stock exchanges for publication of the
prospectus.

Companies are free to appoint one or more agencies as Managers to an issue. SEBI guidelines insist
that all issues should be managed by at least one authorized merchant banker, functioning either as
the sole or lead manager to the issue. Ordinarily, not more than two merchant bankers should be
associated as lead managers, advisors and consultants to a public issue. In issues of over Rs. 100
crores, the number could be up to a maximum of four.

[33]

 REPONSIBILITY OF PUBLIC ISSUE

We have seen that many unscrupulous promoters have raised money from the market. This has hurt
the investors a lot and has also made investors nervous about stock market investments. This in turn
affects the functioning of stock markets both the primary and the secondary markets. It is therefore
necessary that merchant bankers are satisfied with the viability of the project, which they can then
sell to the investors with confidence. It is therefore important for the reputation of merchant bankers,
to only associate themselves with good issues.
The merchant banker should act as the custodians of the investors money and this puts a lot of
responsibility on them. To discharge this function the merchant bankers have to exercise due
diligence independent by verifying the contents of the prospectus and the reasonableness of the
views expressed therein.
It is the responsibility of the merchant bankers to get the securities listed on all the stock exchanges
mentioned in the prospectus. With the introduction of Demat accounts the complaints about
allotment have surely gone down. It is the responsibility of the merchant bankers to ensure timely
refunds and allotment of securities to the investors.
The merchant bankers have to certify that they verified everything and that they believe it to be true.
This assures the investing public about the safety of their investment. The precautions by the
merchant bankers would ensure that all the fake companies, whose intention is to defraud the
investors, dont have access to the market.

UNDERWRITING
Underwriting is like insurance against the failure of an issue. It is a guarantee to the issuing the
company, that the money that it requires for its project will definitely be raised. It means that
even if the issue is not fully subscribed to by the public, the underwriters will make up the short
fall.
Underwriting involves the underwriter agreeing to subscribe directly, or to procure subscription
for the unsubscribe portion of the issue, which is not taken up. For the risk that the underwriter
takes, he is paid commission. New companies entering the markets for the first time, always face
number of problems in raising funds from the market. One of the biggest problems of course that
the company is not well known to the investors and many of them will be unwilling to invest
their money in such ventures. Many a times even existing companies may find it difficult to raise

[34]

money, due to some reasons. Issuing companies therefore approach different underwriters with a
request to underwrite the issue.
Underwriters on their part need to satisfy themselves about the viability of the project and also
about the integrity of the promoters of the company. It must be noted that when an issue is under
subscribed, the underwriters will pick the shares and only if the project is good enough, then in
future they can sell the shares in the market and get not only their money back, but can also make
a decent profit as well.
It is obligatory for the merchant bankers to accept a minimum 5% underwriting in the issue
subject to a ceiling. By taking underwriting in an issue managed by them, they show their full
commitment to the issue that they are managing

MERGERS AND ACQUISITIONS

Mergers and acquisitions (M&A) and corporate restructuring are a big part of the corporate finance
world. Every day, Wall Street investment bankers arrange M&A transactions, which bring separate
companies together to form larger ones. When they're not creating big companies from smaller ones,
corporate finance deals do the reverse and break up companies through spin-offs, carve-outs or
tracking stocks.
Role of Merchant Banker
Mergers & Acquisitions is an area where Merchant Bankers act as intermediaries in negotiating on
one with corporate interested in hiving of divisions/companies which are not with in the purview of
the long-term business strategy of the group/company, and on the other hand for Corporate interested
in non organic growth by acquiring companies/units for reason strategic or non strategic in nature.
Mergers can be beneficial for both the entities, as due to competition the companies unable to survive
or prosper on their own may like to merge and face competition and achieve growth targets.
Takeovers may be hostile or friendly in nature, hostile takeovers are without the consent of the
company and company being takeover may work out an anti takeover strategy to counter the threat.
Merchant Bankers provide following services in M&A: Identification of potential takeover targets.
Financial & Technical appraisal of the merger/takeover proposal.
Negotiation with the parties for arriving at the suitable price or exchange ratio.
Assistance in obtaining necessary approval & addressing procedural & legal issues.
[35]

 PROJECT COUNSELLING
Project counseling is very important and lucrative merchant banking services which only very
few merchant bankers having advantages of knowledge, skills and experience over others are
able to render satisfactorily. The corporate seek advice in respect of identification of profitable
investment opportunities in the related business areas (like forward/backward integration) or as
part of diversification process. The merchant bankers carry out detailed studies on product
demand patterns, cost structures, etc., to enable the corporate in preparation of feasibility study
may involve arrangement of a foreign collaboration, advice on technical parameters and also
legal issues.
Project report
Project report consists of technical process, location, management profile, means of financing,
reports on market surveys and market explorations. Merchant bankers advise the clients on
project preparation. Merchant bankers, on behalf of their clients, engage technical consultants
specialized in the specific area, and marketing experts to prepare technical feasibility report and
market survey reports.
Merchant bankers maintain the list of such experts approves by financial institutions and assign
the work to these experts.
Project report purpose
Project report about the proposed activity is prepared to obtain government approvals particularly
in the following areas:

Grant of industrial license to undertake specified industrial activity.

Foreign investment and technology tie-up.

Grant import license for importing raw material, plant, machinery and equipments.

Grant of foreign exchange allocation for import of capital goods or raw materials, etc.

Grant of subsidies and other concessions from the government at center or state levels or
from government sponsored agencies, etc.
[36]

 LOAN SYNDICATION
It refers to assistance rendered by merchant banks to get mainly term loans for projects. Such loans
may be obtained from a single development finance institution or a syndicate or consortium as in the
case of large term loans. Merchant banks can also help corporate clients to raise syndicated loans
from commercial banks
Scope of service
Once the client company has decided about the project proposed to be undertaken, the next step is
looking for the sources wherefrom funds could be procured to implement the project. The
responsibility of locating the sources of finance, approaching these sources by putting in requisite
prescribed applications and complying with all the formalities involved in the sanction and disbursal
of loan rests with the merchant bankers who provide the service of loan/credit syndication.
Loan syndication in the case of domestic borrowing is undertaken with the institutional lenders and
the banks. Amongst institutional lenders the following institutions are the main suppliers of the long
and medium term funds with which the merchant bankers contact, liaison and arrange loans working
for and on behalf of their clients.

RESTRUCTURING SERVICES
Merchant bankers assist the management of the client company to successfully restructure various
activities, which include mergers and acquisitions, divestitures, management buyouts, joint venture
among others.
To help companies achieve the objectives of these restructuring strategies, the merchant banker
participates in different activities at various stages which include understanding the objectives behind
the strategy (objectives could be either to obtain financial, marketing, or production benefits), and
help in searching for the right partner in the strategic decision and financial valuation of the proposal

[37]

 CAPITAL ASSISTANCE
In providing financial assistance, merchant banks offer a full understanding of all facets of the
capital markets. This includes all types of debt and equity financing available from both the
domestic and international markets.
It should be understood that interest rates are not the only definition of capital costs. Restrictions
on availability, prepayment terms, and operating effectiveness can often outweigh what might
appear to be inexpensive capital with low interest rates. Too often, capital includes costs, which
force an entrepreneur or a business to undertake undesirable actions. In the short-run, some
actions might be necessary, but often in the long run are detrimental. The traditional merchant
banker understands these capital limitations and can structure a transaction, which is beneficial to
all sides of the table -- not just the capital source.
He also knows how to substitute one type of capital for another, sometimes utilizing internal
sources from asset repositioning or cash creation from improvements in working capital. He
understands fully the risk versus return elements necessary to complete the capital procurement
process.

CORPORATE ADVISORY SERVICES

Merchant bankers offer customised solutions to solve the financial problems of their clients. Advice
is sought in areas of financial structuring (as shown in the Modern Manufacturing case above).
Merchant bankers study the working capital practices that exist within the company and suggest
alternative policies. They also advise the company on rehabilitation and turnaround strategies, which
would help companies to recover from their current position
[38]

 FACTORING SERVICE
Factoring involves the outright sale of account receivable. By such sale a client (the exporter or
manufacturer) transfers his/her ownership of the accounts to a factor (an organization, firm). The factor
buys all the clients outstanding invoices and takes over all the subsequent dealings with the
buyer/importer/customer. It is short-term debt financing. Here three parties are involved
1. The factoring organization /firms
2. The manufacturer/exporter/seller
3. The importer/customer/buyer

Role of Merchant Banker In Factoring

The merchant banker may act as factor organization with a view to earning a great amount of
commission. The factor provides the following services:
(a) Financing
(b) Advisory services if necessary
(c) Collection of bills/Account Receivable against sales proceeds.
(d) Maintenance of sales ledger
(e) Provide further if necessary
(f) Covering losses if there are any

[39]

 ASSET SECURITIZATION
It is a process through which some inactive assets (mortgage assets) are converted into cash/active
assets. It is long-term debt financing. Here assets are converted into long-term bonds. The whole
process is done by the Special Purpose Vehicle (SPV). In this approach, the merchant banker for
issuance of security bonds against the assets with a matching of time and terms between mortgage
property and security bonds. Here the selection of asset is generally considered on the basis of the
following:

(I) Quality of assets

(ii) Certainty of repayment
(iii) Good ranking from the credit rating agency.
The process of asset securitization takes place in the following firms:

Originating Institutions/Firm

Special Purpose Vehicle (SPV)

Merchant Banker (MB)

FOREX SERVICES
This aspect of banking is becoming increasingly important as the forex flow in the country is
increasing and the international markets are funding the operations of the corporate in India. The
success of any business is measured by the fund management; this makes treasury management
as a very critical finance function. Management of treasury profit center requires a wide variety
of knowledge in the area of global money markets and financial instruments such as deposit
certificates, treasury bills, forecasting, source evaluation and cost of domestic and foreign
currency funds. Treasury and risk management ensures cost effectiveness in planning strategies
in this era of deregulation.
Role of merchant banker in Forex function

[40]

The currency values, interest rates, share index and commodities affect the financial derivatives
like futures, swaps and other tools of risk management. Corporate therefore employ well-trained
professionals to manage treasury and forex functions so that they can ensure competent
management. Thus, this service is provided to. Corporate through merchant bankers. Merchant
bankers assess various markets to advice. Corporate or other banks that needs currency. Merchant
bankers constantly update about the policies of the regulatory bodies, monitors the current prices,
makes predictions based on the analysis of trends etc

LEASE FINANCE COMPANIES

Lease finance companies provide finance to acquire the use of assets for a stipulated period of time
without owning them. The user of the asset is known as the lessee, and the owner of the asset is
known as the Lessor. Leasing is medium-term arrangement for finance.

Role of Merchant Banker

Merchant Bankers helps in assessing the credit risk of industrial borrowers. The merchant
bankers provide help in evaluating lease proposals. He analyse the merits and demerits of lease
finance with reference to a given proposal and leave it to their clients to decide on the appropriate
source and type of finance, thus enlarging their range of choices and the variety of services
available to them.

VENTURE CAPITAL
Venture capital is money provided by professionals who invest alongside management in young,
rapidly growing companies that have the potential to develop into significant economic contributors.
Venture capital is an important source of equity for start-up companies. Professionally managed
venture capital firms generally are private partnerships or closely held corporations funded by private
and public pension funds, endowment funds, foundations, corporations, wealthy individuals, foreign
investors, and the venture capitalists themselves.
[41]

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.

CHAPTER 6 PLAYER IN MERCHANT BANKING SECTOR

6.1 MERCHANT BANKING ORGANISATIONS

In India, merchant banks operate in the form of Divisions of Indian and Foreign banks and financial
institutions, subsidiary companies established by banks like SBI Capital Markets Ltd., can Bank
Financial Services Ltd., PNB Capital Services Ltd., Indian Bank Merchant Banking services Ltd.,
etc., the firm organized by the stock brokers, stock exchange dealers, the financial and technical
consultants and chartered accountants. Securities and Exchange Board of India (SEBI) has divided
merchant bankers into four categories, which are as follows: -

[42]

CATEGORIES

ACTIVITIES

NETWORTH

Category I

To carry on the activity of issue management and

Rs.1crore

to act as adviser, consultant, manager, underwriter,

portfolio manager.

Category II

To

act

as

adviser,

consultant,

co-manager,

Rs.50 Lakhs

To act as underwriter, adviser or consultant to an

Rs. 20 Lakhs

underwriter, portfolio manager.

Category III

issue.

Category IV

To act only as adviser or consultant to an issue

Nil

Merchant Bankers are classified into 4 categories as shown in the above table having regard to their
nature and range of activities and their responsibilities to SEBI, investors and issuers of securities.
The minimum net worth and initial authorization fee depends on the category.
The first category consists of merchant bankers who carry on any activity of issue management,
determining financial structure, tie-up of financiers, advisor or consultant to an issue, portfolio
manager and underwriter.
The second category consists of those authorized to act in the capacity of co-manager/advisor,
consultant, and underwriter to an issue or portfolio manager.
The third category consists of those authorized to act as underwriter, advisor or consultant to an
issue.
The fourth category consists of merchant bankers who act as advisor or consultant to an issue.

[43]

6.2 PLAYERS OF MERCHANT BANKING IN INDIA

PUBLIC SECTOR

PRIVATE SECTOR

FOREIGN PLAYERS

ICICI Securities ltd

Goldman Sachs Securities

Pvt ltd

Bank of Maharashtra

Axis Bank ltd

Morgan Stanley India

Company ltd

Punjab National Bank

Bajaj Capital ltd

Barclays Securities Pvt

ltd

SBI Capital Market ltd

[44]

State Bank of Bikaner

and Jaipur

Reliance Securities ltd

Bank of America

Karur Vysya Bank ltd

Yes Bank ltd

DSP Merrill Lynch ltd

IFCI Financial Securities

ltd

Kotak Mahindra Capital

ltd

Citigroup Global Market

India pvt ltd

6.3CASE STUDY OF MERCHANT BANKING PLAYERS IN MARKET

ENAM

ENAM was founded in1984 to provide knowledge-driven financial services at the time when Indian
economy investors faced a bewildering array of options. ENAM is the one of the largest underwriters
in India.
[45]

ENAM offers promising & exciting companies the opportunity of assessing the public market equity
finances. ENAMs long-term association with capital markets & primary markets has provided it
with deep insights of the functioning of Indian financial institutions.
The merchant banking services provided by ENAM are: -

Equity debt/syndication: Raising capital through a private placement of a companys securities

is an effective & timely offering to a public offering. ENAM represents the clients in the private
placement of debt and equity with institutional & high net worth investors.

Corporate Restructuring: - ENAM provides client with strategic and practical solutions to
financial challenges. Their restructuring services includes Mergers & Acquisitions, Takeovers,
Debt restructuring, Buyers services etc.
ENAM also provide the seed stage services, value creation services and IPOs advisory services
which are represented below

ICICI SECURITIES

ICICI Securities Limited is a leader across the spectrum of Merchant Banking. We are experienced in
every aspect of the business from domestic and international capital markets advisory, to M&A
advisory, Private Equity syndication, Restructuring and infrastructure advisory. Our investment
banking team, based across key cities in India and New York, London, and Singapore consists of
professionals with expertise across a range of industries.
ICICI SECURITIES provide following services:

[46]

 Mergers and Acquisitions: - ICICI Securities Limited is amongst the first Indian investment
Banks to form a dedicated M&A practice and continues to be a leader by providing innovative
and unique solutions to achieve varied objectives of the client. They offer a full range of advisory
services, which include joint ventures, mergers, acquisitions, and divestitures.

Equity Capital Markets: - ICICI Securities Limited is at the forefront of capital markets
advisory having been involved in most major book building and fixed price offerings over the
last decade. It is amongst the leading underwriters of Indian equity and equity-linked offerings.

Infrastructure Advisory: - ICICI Securities Limited has a dedicated infrastructure vertical

focused on assisting clients in identifying and capitalizing on the opportunities thrown up by the
all pervasive boom in the Indian infrastructure sector.

Dealing with Bulls and Bears: - ICICI Securities Limited assists global institutional investors to
make the right decisions through insightful research coverage and a client focused Sales and
Dealing team. The equity group leverages research and distribution reach to domestic and
foreign institutional investors in case of public offerings.

JM MORGAN STANLEY

Investment Banking focuses on capital raising, mergers, acquisitions, restructuring and financial
advisory and private equity for Indian corporate in the international and domestic capital markets.
[47]

Through innovation and value-added services, the firm has contributed immensely to the overall
development of the capital market and mergers and acquisitions in India. It have the merchant
banking and underwriting licenses from the Indian securities market regulator, the Securities and
Exchange Board of India. Some of the recent transactions of JM Morgan Stanley
US$ 20MM fund raising for Nipuna Services (a BPO subsidiary of Satyam Computer Services)
Rs. 3,219 MM preferential allotment of equity shares/ warrants in Bajaj Auto Finance Limited to
financial investors and the promoter, Bajaj Auto Limited.
The services of JM Morgan Stanley are:

JM Morgan Stanley has a dedicated group that regularly interacts with over 40
financial investors in India as well as overseas.

JM Morgan Stanley offers research-based investment advisory and equity broking

services to corporate, high net-worth individuals and retail investors across a wide range of
financial products.

They are known for lead managing some of the most complex and innovative and
large equity and debt offerings in India and abroad by the Indian issuers. A robust deal-flow
across sectors has allowed them to build significant traction with the financial investors. This
helps in raising private equity capital for the companies.

[48]

 CITI GROUP

Citigroup Corporate and Investment Banking achieve the extraordinary for our clients around the
world. No financial institution is more committed to advancing the goals of its clientsour diverse
and talented staff in more than 100 countries advises companies, governments and institutions on the
best ways to realize their strategic objectives.
We create solutions for and provide the broadest possible capital and market access to thousands of
issuer and investor clients. And no institution better executes the increasingly complex payment and
cash management solutions required in today's global economy. The features Citigroup are as
follows: -

Over the years, Citigroup has established a track record of outstanding business milestones such
as Cash Management, pioneered by Citigroup in 1986 and utilized by over 900 Corporate with
through-puts totaling around $ 35 billion (8% of India's GDP).
It is India's largest foreign bank in the FX (foreign exchange) market with a 14 per cent market
share.
As the leading custodian, Citibank has over $22 billion of custody assets under management.

[49]

DSP MERRILL LYNCH LTD.

DSP Merrill Lynch Limited (DSPML), among India's leading investment banking and Brokerage
Company, is a culmination of a long standing relationship between DSP Financial Consultants Ltd.,
and Merrill Lynch & Co., the leading international capital raising, financial management and
advisory company. DSPML is a full service investment bank and broking company with leadership
position in M&A, Capital
Raising, Securities Research, Equity & Debt Brokering, and Investment Advisory services. Euro
money Magazine has ranked DSPML as the "Best Domestic Securities firm in India" for the last four
consecutive years. This Transaction heralds DSPML as a key player in the private equity market. The
service features of DSPML are as follows: DSPML has consistently been rated as one of India's leaders in origination, distribution, and
trading of equity and debt securities.
DSPML has consistently brought reputable issues to the capital markets.
A diverse client base made up of India's most prestigious private and public sector corporations
and multinational corporations have rendered DSPML a commanding presence in the Indian
capital market.
Through direct market's group, DSPML offers investors access to every major initial or
subsequent public offering.

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DSP Merrill Lynch is the leading underwriter of Indian equity and equity-linked offerings across
domestic and international markets. By leveraging their extensive knowledge of local markets
and global resources, they have delivered innovative and customized solutions to their clients

6.4 ADVANTAGES OF MERCHANT BANKING

In the banking sector, one of the fast emerging trends is a merchant bank. Merchant banks mainly
deal with commercial services to a large scale or small-scale enterprise and even to home business.
People create accounts in these banks in the same manner as done in other banks. Major difference is
that these accounts will issue credit cards. Credit cards make the life easier for merchants by
enabling to receive payments faster and more reliably. These accounts can be used to do online
business. Credit cards have made the trading in foreign countries possible for the merchants.
Merchant accounts have made online transactions much easier and reliable. Some of the great
services offered by a merchant account can be listed as follows:

Account Management:

Account management is one of the useful services offered by the merchant bank. This allows the
customer to manage his own accounts very easily. All the transactions will be listed in the statement
of the account, which makes it easier to go through them. This service can save lots of money and
make the business more efficient for the merchant who is the account holder, by reducing the
employees needed for managing the accounts.

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Transactions on Credit Cards:

Merchant accounts can be very effective in receiving credit card payments from the purchaser's
account to the merchant's account. At the same time credit card transactions has made the payments
from a merchant bank account also very fast
The main advantage of a merchant account is the credit card facility. With a credit card, to buy
products online you don't need to have money in your account. Credit card transaction is a type of
loan. That allows you to buy products online even without having sufficient cash in hand. Therefore
this hastens the buying experience, since there is no need for you to wait for money as it is in the
case of debit card or net banking. Merchant account gives the facility of credit transactions. So it
gives you the privilege of purchasing various products online just by having a credit card.

Security:

It requests you to provide some person information like credit card number when online purchasing
is done. But since only the respective parties that are in the transaction will get this information, the
fear factor is reduced to a greater extent (i.e. merchant is responsible for processing and verification
of the information before submitting). It makes sure that only the required can get access to your
credit card information.

This discussion reveals that, Merchant banks provide some valuable benefits to the merchants.
Regardless of the size of the enterprise you own, these accounts can give benefits to buyers as well
as the seller. A merchant account will be useful for you, either as a buyer or a seller if you are dealing
with online business. On the other hand there are some other service providers who provide services
for online transactions. In any case I will recommend anyone to select a merchant account to be on
the safer side.

6.4 DISADVANTAGES OF MERCHANT BANKING

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Merchant banks are really only for the large corporate customers or extremely wealthy smaller business
owned by individual clients. Merchant banks can be an advantage for these clients but it doesnt act as an
advantage for small scale business clients.
It is not necessary that all the deals carried by merchant banks is a success. Not all the deals carried out by
merchant banks meet with unqualified success
Another disadvantage of merchant bank is that there is always risk attached to the kinds of deals that merchant
banks undertake

6.5 SWOC ANALYSES OF MERCHANT BANKS

Strength, weakness, opportunity and challenge analysis is a technique used to identify the external
and internal factors that play a part in whether a business venture or project can reach its objectives.
Strengths and weaknesses are internal factors, while opportunities and challenges are external.
The analysis is carried out on a four-square or four-cell matrix. The outcome of the analysis allows
the company to decide if it should proceed and if so to build a strategic plan. A more common term
for this approach is SWOT analysis, in which "Challenge" replaces "Threat."
This SWOT Analysis of First Merchant Bank provides a strategic SWOC analysis of the company's
businesses and operations. This free SWOTC analysis shows strengths, weaknesses, opportunities
and threats. This SWOC analysis of First Merchant Bank can provide a competitive advantage.
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 Strengths
-existing distribution and sales networks
-domestic market
-barriers of market entry
-high growth rate
-high profitability and revenue
-experienced business units

Weaknesses
-productivity
-future debt rating
-investments in research and development

Opportunities
-venture capital
-income level is at a constant increase
-new products and services
-new markets
-growing economy
-growing demands
Threats
-rising cost of raw materials
-financial capacity
-government regulations
-increase in labour costs
-increasing rates of interest
-growing competition and lower profitability

With the help of SWOC analysis companies can do inherit study on their goals, their future
achievements, the challenges they have to face and many such important aspects
Financial and Strategic SWOT Analysis provides a comprehensive insight into the company's
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history, corporate strategy, business and financial structure, management and operations.

6.3FACTORS RESPONSIBLE FOR GROWTH OF MERCHANT BANKS

Planning and industrial policy of the country i.e. India in this case
Prevailing Economic condition of the country.
Regulatory system of the market and economy prevailing in India.
Confidence of the people, traders, buyers, marketers, business houses, financial institutions etc.
The economic environment of the outside world.
Competition among the existing players and the upcoming entrants

CHAPTER 7 CURRENT SCENARIO OF MERCHANT BANKING

The recent developments in Merchant banking are due to certain contributory factors in India.
They are.
1. The Merchant Banking was at its best during 1985-1992 being when there were many new issues.
It is expected that 2010 that it is going to be party time for merchant banks, as many new issue are
coming up
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2. The foreign investors - both in the form of portfolio investment and through foreign direct
investments are venturing in Indian Economy. It is increasing the scope of merchant bankers in many
ways.
3. Disinvestment in the government sector in the country gives a big scope to the merchant banks to
function as consultants.
4. New financial instruments are introduced in the market time and again. This basically provides
more and more opportunity to the merchant banks.
5. The mergers and corporate restructuring along with MOU and MOA are giving immense
opportunity to the merchant bankers for consultancy jobs

However the challenges faced by merchant bankers in India are

1.SEBI guideline has restricted their operations to Issue Management and Portfolio Management to
some extent. So, the scope of work is limited.
2. In efficiency of the clients are often blamed on to the merchant banks, so they are into trouble
without any fault of their own.
3. The net worth requirement is very high in categories I and II specially, so many professionally
experienced person/ organizations cannot come into the picture.
4. Poor New issues market in India is drying up the business of the merchant bankers

RECENT TRENDS

Merger & Acquisition transaction -- Merchant banks' services not taxable

The Finance Ministry has excluded services provided by merchant banks and other agencies in
a merger and acquisition (M&A) transaction from the scope of taxable services provided by a
`management consultant.'

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The rationale accorded is that the role of such agencies is limited to compliance of any statute
or regulation -- such as takeover regulations of the Securities and Exchange Board of India
(SEBI) -- and not governed by any contractual relationship with the advisee company.
Merchant banks do not provide any consultancy on an M&A transaction, but merely verify and
submit a report to the authorities concerned, according to the Central Board for Excise and Customs
(CBEC).
Barring the services of merchant banks, any service rendered in relation to an M&A transaction will
be covered under the scope of taxable service provided by the management consultant and will be
liable to service tax, the Board has ruled. Industry representatives held that services provided in
respect of M&A cannot be construed as a management consultancy service, but were in the nature of
financial advisory service.
They further opined that acquisition or divesting of shareholdings was a purely financial transaction
and distinct from the advice or service provided prior to taking a decision to divest, merge or acquire
an organization.

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.

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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 a 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.

ANNEXURE

ARTICLE NUMBER 1

SBI appoints 9 merchant bankers for Rs 15,000 crore share sale

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Economic times 3Feb 11, 2015, 10.16PM IST

MUMBAI: Country's largest lender State Bank of India (SBI) today kicked of its largest-ever fund
raising drive to raise up to Rs 15,000 crore by picking up as many as nine investment bankers,
including Goldman Sachs, Barclays Plc and Bank of America Merrill Lynch sources said.
The other merchant bankers appointed for the share sale are Citigroup, SBI Caps, Axis Bank, JM
Financial, ICICI Securities and Kotak Mahindra Bank, sources added
The fund would be raised either through follow-on public issue, qualified institutional placement,
rights issue, private placement, Global Depository Receipt, American Depository Receipt or
combination of these, the bank had said.

ARTICLE NUMBER 2

ADHL and KDHL convert to merchant banking on lure of forex, brokerage

largesse
2nd September 2015
The lure of largess from foreign exchange (forex) and capital market transactions,
among others may be responsible for the conversion of the two remaining discount
houses, Kakawa (KDHL) and Associated (ADHL) to merchant banks, Business Day
investigations show.

ARTICLE NUMBER 3

New Merchant Banking Guidelines Opens Up Capital Market Access

Aug 31, 2015
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Central Bank of Nigeria (CBN) has unveiled guidelines for the operation of group structure of
merchant banks in the country amending the requirement that they separate their assets management
and capital market operations from their banking business.

ARTICLE NUMBER 4

Scepter Partners Forms Dedicated Merchant Bank for Sovereign Investors and Family
Offices
24 august 2015
Scepter Partners, a standing syndicate of sovereign investors and ultra-high net worth families,
announced the formation of its core merchant banking division with veteran investment banker and
his former Blackstone Advisory Partners Asia team which will lead all merchant banking activities of
Scepter, which will consist of syndication, structuring and execution.

BIBLIOGRAPHY

The whole project is been done on the basis of secondary data. The books magazines and the
websites used for this project are as follows

BOOKS REFERED
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 Merchant Banker H.R. SUNEJA

Merchant Banking Principles & Practices- H.R.MACHIRAJU
Merchant Banking in IndiaB.C. LAKSHMANNA & C.N. KRISHNA NAIK
Merchant Banking J.C.VERMA (3rd & 4th Edition)

WEBSITES

www.google.co.in
www.yahoo.com
www.economictimes.com
www.jmmorgansranley.com
www.dspml.com
www.sebi.com

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