Documente Academic
Documente Profesional
Documente Cultură
On
COMPREHENSIVE STUDY OF
MERCHANT BANKING SERVICES IN
INDIA
.
Submitted in partial fulfillment of the requirement for the
degree of
Master of Business Administration
Session (2008-10)
Submitted To:
A project report is never the sole product of a person whose name appears on the cover.
There is always the help, guidance and suggestions of many in preparation of such a
report. So, I have indebted to several people who have helped me in completing my
projectComprehensive Study Of Merchant Banking Services In India
I wish to express my sincere thanks to Dr. Ramesh Chand Dalal, University School of
Management Kurukshetra University, Kurukshetra for his valuable guidance and
pain taking supervision during course of my present work. His keen interest, timely
and constant encouragement and generous cooperation gave me confidence and
strength to progress this report. His valuable advice, constructive criticism and
suggestion during course of my study really helped me a lot. I also thank him for
providing full facilities required in submitting our report within a limited time span.
I am also thankful to all the employees working in the department for their
continuous help and advice at different times.
I would be failing my duty if I dont mention my friends and classmates who helped me
at various moments, during my project.
Specially, I am thankful to my parents and God for their blessings and showing me the
right way at all moments.
Ritesh Pasrija
2
Declaration
I, Ritesh Pasrija, Roll No. 66, class MBA(GEN) 2 year, IV semester of the University
School of management, hereby declare that the project entitled Comprehensive Study
Of Merchant Banking Services In India is an original work and the same has not been
submitted to any other institute for the award of any other degree. The project report was
submitted to the supervisor on 26-04-2010. The feasible suggestions have been duly
incorporated in consultation with the supervisor.
Signature of Candidate
3
Table of Contents
1. Executive Summary 5
2. Introduction 6-8
3. Justification of the study 9-10
4. Review of the existing literature 11-13
5. Objectives of the study 22-26
6. Research Methodology 27-29
7. An insight on Merchant Banking 30-47
8. Issue Management 48-58
9. Merchant Bankers Commission 59-60
10. Analysis of the study 61-65
11. Recommendations 66-67
12. Conclusion 68-69
EXECUTIVE SUMMARY
4
The research studies are of great help in enhancing the knowledge of a person.
correlated with practical research situation. It is in this sense that the research
project is made compulsory for curriculum and has a significant role to play in
the field of business management. Through this type of project, one can
which make the success dears. In this project I have put lot of make success
obligatory part of M.B.A curriculum. My purpose for this project is the analysis
5
INTRODUCTION
6
INTRODUCTION
The term merchant banking is used differently in different countries and so there is
no precise definition for it. In London, Merchant banker refers to those who are
members of British Merchant Banking and Securities House Association who carry
The notification of Ministry of Finance defines a merchant banker as, any person
management.
foreign trade through acceptance of bill. Later, the merchants assisted the
7
flotation of bonds in London money market. Over a period, they extended their
underwriting of new issues, acting as registrars and share transfer agents, debenture
trustees, portfolio managers, negotiating agents for mergers, take over etc. The post
war period witnessed the rapid growth of merchant banking through the innovative
instrument like dollar and the growth of various financial centers like Singapore,
8
JUSTIFICATION
OF
9
THE STUDY
services in India. Merchant banking services in India cover a wide range of activities
which are fund-based and non-fund based financial and investment services
10
capital issues etc. In the study I will research on to know about the growth of
merchant banking in India, the range of merchant banking services, the qualities of
good merchant bankers, the role of the merchant bankers, the guidelines for
merchant bankers, the scope of merchant banks. In the study I will research on the activities
performed by merchant bankers and the guidelines provided by the SEBI to the merchant
bankers in India. In the study the main emphasis is on the various strategies of banking sector
REVIEW
OF
11
EXISTING
LITERATURE
12
An institution which covers a wide range of
Merchant banking activity was formally initiated into the Indian capital market when
Grind lays Bank received the license from Reserve Bank in 1967.
Grind lays which started with management of capital issue, recognized the needs of an
emerging class of entrepreneurs for diverse financial services ranging from production
planning and system design to market research Apart from meeting specially, the
needs of small scale units, it provided management consultancy services to large and
medium sized companies. Following Grind lays Bank, Citi Bank set up its merchant
banking division in 1970. The division took up the task of assisting new entrepreneurs
and existing units in the evaluation of the new project and raising funds through
borrowing and equity issues. Management consultancy services were also offered.
1972, that Indian banks should offer merchant banking services they could provide
their clients, State Bank of India started the Merchant Banking division in 1972. In the
13
initial years the S.B.I.s objectives was to render corporate advice and assistance to
The commercial banks that followed State Bank of India were Central Bank of India. Bank of
India and Syndicate Bank in 1977; Bank of Baroda, Standard Charted Bank and Mercantile Bank
in 1978; and United Bank of India, United Commercial Bank, Punjab National Bank, Canara
Bank and Indian Overseas Bank in late 70s and early 80s. Among the development banks,
ICICI started merchant banking activities in 1973, followed by IFCI (1986) and IDBI (199
Conceptualization
Any person who is engaged in the business of issue management either by making
management .
14
Focus of the problem
Commercial bank is very satisfactory. The scope of Merchant Banking activities is very
bright in India for commercial banks and financial consulting firms/companies due to
15
a) Fund Management :-
under management of Schroeders have swollen five fold to 74 billion pounds in the ten
years to the end of 1995. Fund management contributes to nearly half of Schroeders
annual profits. Flemings management 60 billion pounds, Rothschild 17 billion pound and
b) Portfolio Management :-
banking activities recognized by Securities Exchange board of India (SEBI). The Portfolio
Management Service can be rendered either by the SEBI authorized categories I & II
defined in clauses (E) and (F) of rule 2 of securities and Exchange Board of India
According to the definitions as contained in the above clauses, a Portfolio Manager means
any person who pursuant to a contract or arrangement with a client, Advisers or directs or
clients, as the case may be. A merchant banker acting as a Portfolio Manager should also be
c) Project Counseling :-
16
Project Counseling is very important and lucrative
merchant banking service which only very few merchant bankers having advantages of
knowledge, skills and experience over others are able to render satisfactorily. Efforts
have been made to pass on the requisite knowledge, skills and useful information
gathered on the basis of experience of experts engaged in project appraisals and project
them to gather in expertise in broader areas of the project counseling techniques and
procedures.
d) Venture Capital :-
market. There are 35 venture capital fund registered with SEBI apart from one foreign
venture capital firm registered with SEBI. Data available for 14 firms indicate that total
funds available with them at the end of 1996 were Rs. 1402 crores, which Rs. 672.85
crores had been invested in 6212 projects in 1996. Venture Capital, which was
originally restricted to risk capital, has become now private equity. Venture capital
represents funds invested in new enterprises, which are risky but promise high returns.
VCFs finance equity of units, which propose to use new technology and are promoted
by technical and professional entrepreneurs. They also provide technical, financial and
managerial services and help the company to set up a track record. Once the company
meets the listing requirements of the OTCEI or stock exchanger, VCF can disinvest its
shares .
17
e) Stock Exchange Operations :-
Most stocks are traded on Exchanges, which are places where buyers and sellers
meet and decide on price. Some exchanges are physical locations where transactions
arte carried out on a trading floor. Youve probably seen pictures of a trading floor,
in which traders are widely throwing their arms up, waving, yelling and signaling to
each other. The other type of exchange is a virtual kind, composed of a network of
facilitate the exchange of securities between buyers and sellers, thus reducing the
risks of investing. Just imagine how difficult it would be to a sell shares if you had
to call around the neighborhood trying to find a buyer. Really, a stock market is
nothing more than a super-sophisticated farmers market linking buyers and sellers.
Before we go on, we should distinguish between the primary market and the
secondary market. The primary market is where securities are created (by means
people are referring tom when they talk about the stock market. It is important to
understand that the trading of a companys stock does not directly involve that
company.
The term market can have many different meanings. One usage of the term
denotes the primary market and the secondary market. These two markets
distinguish between the market where securities are created and the market where
18
they are traded among investors. Their function is key in understanding how stocks
trade.
Primary Market :
The primary market is where securities are created. Its in this market that firms sell
(float) new stocks and bonds to the public for the first time. For our purposes, you
can think of the primary market as being synonymous with an initial public offering
(IPO). Simply put, an IPO occurs when a private company sells stocks to the public
IPOs can be very complicated because many different rules and regulations dictate
and prospects and the particularities of the issue, is field to the appropriate
is not finalized and not a solicitation by the company issuing the new shares.
company.
3. Governing bodies must approve the finalized statement and then a final
the company. This final prospectus is legally binding for the company.
The important thing to understand about the primary market is that you arte
19
Secondary Market:
The secondary market is what people refer to when they talk about the stock market.
This includes the NYSE, NASDAQ, and all major exchanges around the world. The
securities without the involvement of the issuing companies. For example, if you go to
buy Microsoft stock, you are dealing only with another investor who owns shares in
The secondary market can be further broken down into two specialized categories:
In the auction market, all individuals and institutions wishing to trade securities will
congregate into one area and announce the prices at which they are willing to buy sell
(bid and ask offers). The idea is that an efficient market should prevail by bringing
together all parties and having them publicly declares their prices. Thus, theoretically,
the best price of a good need not be searched for because the convergence of buyers and
sellers will cause mutually-agreeable prices to emerge. The best example of an auction
institutions will specialize in specific securities or commodities and then buy and sell
according to the demand of the market. These declare then earn profits through
differences in the posted bidding and asking prices for their specific securities. The
rationale behind a dealer market is convenience: investors arent required to wait for
other participants before a transaction can occur. Thus, many over-the-counter markets
are classified as dealer markets since the demand and supply for particular stocks is not
20
always enough to meet the requirements of different investors, allowing the specialist to
intervene by buying and selling out of personal inventories. Most bonds are in dealer
markets, and the NASDAQ stock exchange can also be classified as this type.
Third and fourth markets, as they involve significant volumes of shares to be transacted
per trade, arent for regular investors. The third market began as a rogue over-the-
counter market for large institutional investors not wishing to pay the set commissions
determined by the NYSE. This third market has slowly been phased out of use since
many of the commission schedules set by the NYSE have been removed. The Fourth
market is very similar to the third market except for the fact that no brokers are
involved in the transaction. An example is a direct trade between two large institutions.
This off, its good to have a general understanding of the structure of the market. If you
understand how securities are brought to market and then traded on various exchanges,
you will know what is central to the markets functioning properly. Just imagine if
organized secondary markets did not exist-youd have to personally track down other
In fact, many investment scams revolve around securities that have no secondary
market. The ability to sell a security (liquidity) is often taken for granted. If a security
doesnt have a market, you can get stuck with a big loss and no options. As this is so
often the case, a little education might save you some money in the long run.
21
22
OBJECTIVES
OF
THE STUDY
23
To know what are their general obligations and responsibilities.
various services provided by banking sector with special reference to merchant banking.
24
Merchant banking services in India cover a wide range of
activities which are fund-based, on-fund based financial and investment services encompassing
and debentures in new capital issues, dealing in money market instruments, like
25
placement of commercial papers, certificates of deposits, treasury bills, transactions etc.
documents: merchant bankers have to keep and maintain a copy of the balance sheet, a
copy of auditors report and a statement of financial position, merchant bankers should
inform SEBI where the accounts, records and documents are maintained.
Merchant bankers have to furnish annually to SEBI copies of balance sheet, profit and
loss account and such other documents for any other preceding five accounting years as
required.
Merchant bankers are required to submit SEBI half yearly working results with a view
to monitor their capital adequacy. Books, records and documents should be preserved
for five years. Auditors report should be acted upon within two months. Merchant
bankers should execute an agreement with the issuing company setting out their mutual
rights, liabilities and obligations to such issue and particular to disclosures, allotment
and refund.
Number of Lead Managers: The number of lead manger depends on the size of the
public issue. The guidelines stipulate that for an issue unto Rs. 50 crores, the number of
lead manager should not exceed two, for issue between Rs. 50-100 crores maximum of
26
three, for issues between Rs. 100-200 crores of four, for issues above Rs.200 crores but
less than Rs.400 crores, five, and for issues of above Rs.400 crores, five or more as may
be agreed by SEBI.
27
RESEARCH
METHODOLOGY
Research Methodology
28
While conducting any study, the method adopted for it is to be given due consideration.
Wide ranges of alternative approaches are available to choose from therefore ultimate
satisfied that the method adopted is the best as compare to those rejected, only them
proceed further.
problem. It is a written game plan for conducting research. It tends to describe the step
taken by researches in studying the research problem along with logical background.
It tends to describe methodology for solution of the problem that has been taken for the
purpose of study. This project focuses on the methodology for technique used for the
collection, classification & tabulation of the data. This plan throws light on the research
Methodology for problem as the same way differs from problem to problem.
The main motive behind the research is to know the various services provided by
Research Design: -
29
A research design is the specification of the methods and procedures for acquiring
the information needed to structure or to solve the problem. It is overall framework of the project
that stipulates what information is to be collected from which sources and which procedure.
Secondary Data.
Research Type:-
Descriptive Collection: -
Sample Size:-
30
AN INSIGHT
ON
MERCHANT BANKING
31
In late 17 th and early 18 th century Europe, the largest companies of the world was
trading posts, the collected large amounts of money to finance trade across parts of the
world. For example, The East India Trading Company secured a Royal Warrant from
England, providing the firm with official rights to lucrative trading activities in India.
This company was the forerunner in developing the crown jewel of the English Empire.
The English colony was started by what we would today call merchant bankers, because
transactions.
The colonies of other European countries were started in the same manner. For example,
the Dutch merchant adventures were active in what is now Indonesia, the French and
Portuguese acted similarly in their respective colonies. The American colonies also
represent the product of merchant banking, as evidenced by the activities of the famous
Hudson Buy Company. One does not typically look at these countries economic
colonies and their progress stem from the business of merchant banks, according to
Merchant Banking, as the term has evolved in Europe from the 18 th century to today,
32
the busyness process between a product and the financial requirements for its
development. Merchant banking services span from the earliest negotiations from a
In particular, the merchant banker acted as a capital sources whose primary activity was
directed towards a commodity trader/cargo owner who was involved in the buying,
selling, and shipping of goods. The role of the merchant banker, who had the expertise
to understand a particular transaction, was to arrange the necessary capital and ensure
that the transaction would ultimately produce collectable profits. Often, the merchant
banker also became involved in the actual negotiations between a buyer and seller in a
transaction.
During the 20 th century, however, European merchant banks expanded their services.
They became increasingly involved in the actual running of the business for which the
transaction was conducted. Today, merchant banks actually own and run business for
Since the 18 th century, the term merchant banker has, therefore, been considerably
broadened to include a composite of modern day skills. These skills include those
banker plus that of a transaction broker. Today a merchant banker is who has the ability
modern European bank, in many ways, reflects the early activities and breadth of the
33
Most companies that come to a U.S. merchant bank are looking to increase their
might not be ones own (originally merchant bankers supplied their own capital and
thereby took an equity interest in the transaction); 3) and most importantly, Effective
skills in concluding a transaction-the actual sale of the product and the collection of
profit. Some people might question whether or not there are many individuals or
organizations that have the abilities to fulfill all three areas of expertise.
Merchant banking services in the U.S. however, have been undertaken by highly
specialized boutiques, where each offers its own specialized service. The typically
charge fee income for each service, and transactions are oriented toward short-term
Very few offer the complete range of services that are available through traditional
European merchant banks. In fact, most companies that come to a U.S. merchant bank
immediate capital need. They are not looking for the actual on-line operating advice
CAPITAL ASSISTANCE
34
In providing financial assistance, merchant banks offer full understanding of all facets
of the capital markets. This includes all types of debt and equity financing available
from both domestic and international markets. A merchant banker, cognizant of capital
costs, looks for best sources of capital, including its restrictions and dollar limitations.
It should be understood that interest rates are not only definition of capital costs.
outweigh what might appear to be inexpensive capital with low interest rates. Too often,
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
35
There are many merchant bankers operating in North America today, both large and
small, though only a subset offer a full range of services, before selecting a merchant
banker, one should decide what services are required. Is it capital, general management
It is paramount to know who in such an organization is best qualified to fill these needs.
Also, selection of the merchant banker depends on whether one needs to satisfy short or
In the final analysis, it is personal relationship between the parties that will determine
the chances of success. One may find the smaller merchant banking companies are both
comprehensive in their services and reliable. They may effectively handle all
transaction elements, while remaining within ones cost parameters. Moreover, these
smaller firms can offer more personalized services, better performance and quicker
Locating a merchant bank that fits a particular need can be as difficult as the transaction
itself. Even though there are such directories as that published by the American
Bankers Association of Security Dealers and the Directory of Corporate Finance, there
are no sources that evaluate the abilities of North American merchant bankers. For each
transactions needs, one must assess the skills of a merchant banker while examining
36
As planning and industrial policy envisaged the setting up of new industries and
According to Goldsmith, there is a well- proven link between economic growth and
financial technology.
individual saving; finance companies for consumer lending and mortgage finance;
companies for life and property cover; agricultural banks for rural development; and a
were set up and business expanded, they required additional financial services, which
were then not provided by the banking system. Like the local banking system and the
trade before, the local system of family enterprises was unsuited for raising large
amounts of capital. A public equity or debt issue was the logical source of funds.
Merchant banks serve a dual role within the financial sector. Through deposits or sales
of securities they obtain funds for lending to their clients (SEBI forbids lending by
them): a function similar to most institutions. Their other role is to act as agents in
return for fee. SEBI envisages a mandatory role for merchant banks in exercising due
diligence apart for issue management, in buy-backs and public offer in take over bids.
Their underwriting and corporate financial services are all fee rather than fund based
and their significance is not reflected in their total assets of the industry. SEBI has
37
The working of merchant banking agencies and units formed subsequently to offer
merchant banking services has shown that merchant banks are rendering diverse
services and functions, such as organizing and extending finance for investment in
dollar loans and issue of foreign currency bonds, financing of local authorities,
merchant banks offer all these services. Different merchant bankers specialize in
different services. Merchant banking may cover a wide range of financial activities and
in the process include a number of different financial institutions. In the last 25 years
new services and functions apart from issue management have been added. Merchant
Bankers render their specialized assistance in handling the following major activities:
Project management
Issue management
Counseling
Loan Syndication
38
Organization of Merchant Banking Units
characteristics:
In the words of Skully, a merchant bank could be best defined as a financial institution
conducting money market activities and lending, underwriting and financial advice, and
decisions rapidly.
39
Definition of Merchant Banker
The Notification of the Ministry of finance defines a merchant banker as, any person
amendment regulations specify that issue management consists of prospectus and other
and final allotment and refund of the subscriptions, underwriting and portfolio
management services.
Initially merchant bankers were classified into four categories 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 depend on the category.
Since September 5, 1997 only Category I exists. The first category consists of merchant
bankers who carry on any activity of issue management. Which will inter alia consists
financial structure, tie-up of financiers and final allotment and refund of the
subscription and to act in the capacity of managers, advisor or consultant into an issue.
Net worth : Minimum net worth for first category is Rs. 1 crore.
40
Registration Fee : Registration fee for first category is Rs. 5 lakhs annually in the
first three years, Rs. 25 lakhs in fourth year. Renewal is every three years.
In addition merchant banker has to pay fees per offer document; Rs. 10000 up to Rs.5
crores; Rs. 15000 for Rs. 5-10 crores; Rs. 25000 for Rs. 25-50 crores; Rs. 5000 for Rs.
50-100 crores; Rs. 250000, Rs. 100-500 crores; and Rs. 500000, above Rs. 500 crores.
Code of Conduct
The code of conduct stipulates that in the performance of duties, merchant banker
should act in an ethical manner, inform the client that he is obliged to comply with the
code of conduct, render high standard of service and exercise due diligence, not to
indulge in unfair practices, not to make misrepresentations, give best advice, not to
divulge confidential information about the clients, endeavor to ensure that true and
Finally merchant bankers should not be a party in respect of issue of securities, creation
abide by all rules, regulations, and guidelines, resolutions issued by the government of
41
Responsibilities of Lead Manager
Lead managers should not agree to manage any issue unless his responsibilities relating
to the issue mainly disclosures, allotment and refund are clearly defined. A statement
specifying such responsibilities should be furnished to SEBI at least one month before
the reasonableness of the views expressed therein should be issue by the lead merchant
banker.
may be.
42
These documents should be furnished at least two weeks before filing the draft
prospectus or letter of offer with ROC or with Regional Stock Exchange. The lead
manager has to ensure that modifications suggested by SEBI are incorporated. The lead
of any issue should continue to be associated with the issue till the subscribers have
Debentures
Warrants
Income Bonds
Junk Bonds
Index Bonds
Retirement Bonds
Equity Shares
43
Changing role of a Merchant Banker
In the past.
The role of the merchant banker was to arrange the necessary capital and ensure that the
Today.
This shows that the breath and depth of a merchant bankers activity has changed over
the years.
Service offered : The wide gamut of services offered by a merchant banker includes:
Issue management: This forms the Bread and Butter operations for most merchant
Instrument designing
Marketing efforts
44
Corporate advisory services:
Merchant bankers offer customized 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 on rehabilitation and turnaround strategies, which would help
companies to recover from their current position. They also provide advice on
Merchant bankers help clients to conceptualize the project idea, to carry out feasibility
studies to find out the viability of the project, and also to appraise their project.
Loan syndication:
These financial intermediaries arrange loans, for their clients, by analyzing their cash
flow pattern, so that the terms of borrowing meet the clients cash requirements. They
Restructuring strategies:
45
To help companies achieve the objectives of these restructuring strategies, the merchant
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
46
Merchant bankers and service provider of merchant banking
Public Sector:
Private Sector:
47
Indian Overseas Bank
Syndicate Bank
Deutsche Bank AG
48
ISSUE
MANAGEMENT
49
ISSUE MANAGEMENT
to public and existing share holders on rights basis. Issue management parlances are
known as Merchant Banker or Lead mangers. Although the term Merchant Banking, in
generic term, covers a wide range of services such as project counseling, portfolio
Issue management constitutes perhaps the most important and sizeable function within
it. So much so, that very often, the term merchant banking and Issue Management are
the definition of Merchant Banker as contained in the Securities and Exchange Board
of India (Merchant Banker) rules and regulations. 1992, viz, Any person who is
50
Types of Issues
Existing as well as new companies raise funds through various sources for
1. Public Issue
2. Right Issue
3. Private Placement
Public Issue
The most method of raising funds through issues is through prospectus. Public issue is
made by a company through prospectus for a fixed number of shares at a stated price.
Which may be at par or premium, and any person can apply for the shares of the
company. The prospectus has to disclose all material and essential factors about the
company to the intending purchase of shares. The Schedule-II of the Companies Act,
1956 specifies the matters to be stated and reports to be set out in the prospectus.
Securities and Exchange Board of India has laid down guidelines for raising funds from
the public. The guidelines relate to adequate disclosures in the prospectus so that the
51
Right Issue
Right Issue are issues of new shares in which existing shareholders are given
preemptive rights to subscribe to new issue of shares. Such further shares are offered in
proportion to the capital paid-up on the shares held by them at the date of such
obligation to accept the offer. On the other hand, they have right to renounce the offer a
favor of any person. Right shares are usually offered on terms advantageous to the
shareholders. For example, shares of the face value of Rs. 10 may be offered at par
value, while the market price of the share at the time of offer may be Rs.15 or more.
Private Issue
and debentures. It is assumed that the investors have risks of the investment. The
financial intermediary, however, plays a vital role in preparing can offer memorandum,
and negotiating with investors. The private placement has obvious advantage of sped
and confidentiality. Private placement offers access to capital more quickly than public
issue, which may take six months of one year. On the other hand, it is possible to raise
Access to primary market is quite costly on account of various mandatory and non-
mandatory expenses. Some public companies are too small to afford a public issue.
52
Further the requirement of companies may be smaller than the minimum stipulated for
the public issue for listing at different stock exchanges. Finally private placement is not
influenced like the primary market by the prevailing bull or bear phases in the stock
market. The attitude of institutional investors towards the regular issue of securities in
53
Who can be an Issue Manager?
Since setting up of SEBI, Issue Managers are required to be registered with SEBI so as
to carry on their Issue Management activities. SEBI has formulated Rules and
Regulation for merchant bankers, which bring out the requirements for Registration of
issue managers apart from prescribing the conduct rules for them. In terms of these
Issue Manager should have necessary infrastructure like adequate office space,
Issue Managers should have minimum tow persons who have experience to
Issue Manager should fulfill capital adequacy requirements i.e. he should have a
54
In term of SEBI Regulations, there are restrictions on the number of Issue Managers
55
Roles of Issue Manager
An Indispensable Pilot:
Under SEBI guidelines, a public/ rights issue cannot be floated without the association of
a Merchant Banker. Merchant banker, like pilots of air-crafts are repositories of special
A Financial Architect:
One of the important areas of Issue Management relates to capital structuring, Capital
gearing and financial planning for the company. While performing these activities
An Investors/Underwriter:
Merchant Bankers also underwrite and invest in the Issue lead managed by them.
A Co-traveler:
Merchant bankers also sometimes act as market makers in Issues lead managed by them.
They invest, continue to hold and offer and sell quotes for the Scrips of the company after
Listing. Thus, as market makers, their association is not merely restricted management of
Under the SEBI guidelines, every Merchant Banker while managing a capital Issue is
expected to perform Due Diligence and furnish a Due Diligence Certificate to SEBI.
Association of Merchant Bankers of India (AMBI) has prescribed detailed Due Diligence
56
guide to its members to facilitate their performance of due diligence. SEBI has also
A Zubin Mehta:
number of institutions and agencies. Merchant banker like an able conductor of orchestra
has to ensure that all the players complete their jobs timely and with proper co-
A Satellite of SEBI
Each Merchant banker is required to be registered with SEBI. While managing issues
they are required to interact and file offer documents with SEBI. They are also required
to file number of reports related to Issue management by them with SEBI. In a nut shell,
A Dream Merchant:
Marketing of an issue is an essential and perhaps the most important component of Issue
57
PUBLIC ISSUE MANAGEMENT
Raising money from the capital market needs planning the activities and chalking out a
sources, the quantum, the appropriate time the cost of raising capital and the possible
impact of such resources on the overall capital structure besides the law governing the
issue. There are various activities required for raising funds from the capital markets.
Pre-Issue Activities
Determination of Optimum
Convening An EGM
Preparation of Documents
Due Diligence
58
Promoters Contribution
Post-Issue Activities:
After the closures of the Issue, the Lead Manager has to manage the Post-Issue activities
pertaining to the issue. Certificate of 90% subscription from Registrar as well as final
59
MERCHANT
BANKERS
COMMISSION
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Merchant Bankers Commission
3. A lead manager can claim a commission of 0.5% upto Rs. 25 crore and
4. Underwriting commission
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6. Other expenses like advertising printing, Registrars expenses, stamp duty
etc., in connection with the issue can be reimbursed from its clients.
ANALYSIS
OF
THE STUDY
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Analysis of the study
Merchant Bankers services cover wide range of activities which are fund-based and non-
fund based activities. These activities are financial and investment services
Commercial bank is very satisfactory. The scope of Merchant Banking activities is very
bright in India for commercial banks and financial consulting firms/companies due to the
new activities like fund management, portfolio management, stock exchange operations,
The commercial banks that followed the services of the merchant banking activities are
State Bank of India were Central Bank of India. Bank of India and Syndicate Bank in
1977; Bank of Baroda, Standard Charted Bank and Mercantile Bank in 1978; and United
Bank of India, United Commercial Bank, Punjab National Bank, Canara Bank and Indian
Overseas Bank in late 70s and early 80s. Among the development banks, ICICI started
merchant banking activities in 1973, followed by IFCI (1986) and IDBI (199
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The merchant banking activities include the services of the primary market, secondary
market and third and fourth market services. Merchant Banker provides all the services of
and debentures in new capital issues, dealing in money market instruments, like
profit and loss account and such other documents for any other preceding five
accounting years as required. Merchant bankers are required to submit SEBI half
yearly working results with a view to monitor their capital adequacy. Books,
records and documents should be preserved for five years. Auditors report
should be acted upon within two months. Merchant bankers should execute an
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agreement with the issuing company setting out their mutual rights, liabilities
and obligations to such issue and particular to disclosures, allotment and refund.
In the past the role of the merchant banker was to arrange the necessary capital
broker.
This shows that the breath and depth of a merchant bankers activity has
their clients. Advice is sought in areas of financial structuring (as shown in the
Modern Manufacturing case above). Merchant bankers study the working capital
strategies, which would help companies to recover from their current position.
Merchant bankers help clients to conceptualize the project idea, to carry out
feasibility studies to find out the viability of the project, and also to appraise
their project.
These financial intermediaries arrange loans, for their clients, by analyzing their
cash flow pattern, so that the terms of borrowing meet the clients cash
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Merchant bankers assist the management of the client company to successfully
searching for the right partner in the strategic decision and financial valuation of
the proposal.
Since setting up of SEBI, Issue Managers are required to be registered with SEBI
and the Regulation for merchant bankers, which bring out the requirements for
Registration of issue managers apart from prescribing the conduct rules for them.
Number of Lead Managers: The number of lead manger depends on the size of
the public issue. The guidelines stipulate that for an issue unto Rs. 50 crores, the
number of lead manager should not exceed two, for issue between Rs. 50-100
crores maximum of three, for issues between Rs. 100-200 crores of four, for
issues above Rs.200 crores but less than Rs.400 crores, five, and for issues of
So that Merchant Banking plays a vital role and performed a wide range of
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RECOMMENDATIONS
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Recommendations
The Merchant bankers should try to reduce their commission, which they
are charging from their clients as in the issue management they are
They should try to provide some extra benefits to their clients. Merchant
All the Merchant bankers should try to improve the Domestic Market.
The Merchant Bankers provide all the information related to services to the
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CONCLUSION
69
Conclusion
The merchant banker plays a vital role in channelising the financial surplus of
merchant banker, one must decide what the services for which he is being
approached. Selecting the right intermediary who has the necessary skills to meet
higher and higher premium to attract the business. In many cases their pricing
Finally, it has been concluded that, there is no uniform pricing methodology and
no Lead Manager is following the same methodology for all the issues handled.
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LIMITATIONS
OF
71
THE STUDY
(a) Time factor for the study is not sufficient to do intensive study and to
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BIBLOGRAPHY
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Bibliography
Dr. Verma J.C. Merchant Banking 3rd Edition Inter India, New Delhi.
Machiraju H.R. Merchant Banking 2nd Edition Wheeler Pub. New Delhi.
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Financial journals
Website
www.google.com
www.icicisecurities.com
www.sbifinancialmarket.com
www.indiainfoline.com
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