Unit- 1

Merchant banking
2-Marks
1. Define financial System.
It is a system for the efficient management and creation of finance.
According to Robinson, financial system provides a link between savings and investment for the creation of new
wealth and to permit portfolio adjustment in the composition of the existing wealth.
According to Van Horne, financial system is defined as the purpose of financial markets to allocate savings
efficiently in an economy to ultimate users – either for investment in real assets or for consumption.
2. Mention the various objective of financial system
The objectives of the financial system are
1. Accelerating the growth of economic development.
2. Encouraging rapid industrialization
3. Acting as an agent to various economic factors such as industry, agricultural sector, government etc.
4. Accelerating rural development
5. Providing necessary financial support to industry
6. Financing housing and small scale industries
7. Development of backward areas, infrastructure and livelihood
8. Imposing price control in need
3. What are the various functions of financial system?
Controlling functions - Government imposes certain controls over the financial and business activities of
different organizations through the regulatory bodies. E.g. RBI plays an important part in regulatory functions.
Promotional functions - Efficient operation of the payment mechanism. Managing information to make it easily
available to all interested parties. Providing training to investors, intermediaries and employees in order to
Upgrade their skills.
4. What are the major components of financial system?
(a) Financial Institutions (b) Financial Markets (c) Financial Instruments (d) Financial Services.
5. What are the major components of financial market?
a) Capital Market (b) Money Market (c) Foreign Exchange Market (d)government security Market
6. What you mean by capital market?
It is the market for long term funds i.e., raising capital for Companies through issue of shares and debentures. The
Capital market can further divided into (a) Primary Market and (b) Secondary Market
7. Define money market.
It is a market for short term funds. Money market provides working capital.
8. Mention some of the major classification of financial Instruments
(a) Negotiable Instruments, (b) Commercial Paper, (c) Bill of lading, (d) Letter of Credit, (e) Traveler’s Cheques
9. Define merchant banking.
Securities and Exchange Board of India (Merchant Bankers) Rules, 1992
“ A merchant banker has been defined as 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 corporate advisory services in relation to such issue management”.
Charles P. Kindleberger “Merchant banking is the development of banking from commerce which frequently
encountered a prolonged intermediate stage known in England originally as merchant banking”
The Notification of the Ministry of finance defines A merchant banker as ,”any person who is engaged in the business of
issue management either by making arrangements regarding selling, buying or subscribing to the securities as manager,
consultant, adviser or rendering corporate advisory service in relation to such issue management”.
10. What are the major functions of merchant bankers?
(a)Corporate Counseling, (b) Project Counseling, (c) Capital Structuring, (d) Portfolio Management, (e) Issue
Management
(f)Credit Syndication, (g)Working capital, (h) Venture Capital, (i) Lease Finance ,(j)Fixed Deposits.
11. What are the secondary functions of merchant bankers?
(a)Treasury Management,(b) Stock broking, Servicing of issues,(c) Small Scale industry counseling,(d) Equity research
and investment counseling,(e) Assistance to NRI investors, (f)Foreign Collaboration.

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12. Mention the major classification of merchant bankers by SEBI.
(a)Issue management,(b) Underwriters, (c)Consultants to Issue, (d)Mobilization of foreign funds.
13. What are various categories for the registration can be obtained.
The categories for which registration may be granted are given below:
Category I – To carry on the activity of issue management and to act as adviser, consultant, manager, underwriter,
portfolio manager.
Category II - To act as adviser, consultant, co-manager, underwriter, portfolio manager.
Category III - To act as underwriter, adviser or consultant to an issue
Category IV – To act only as adviser or consultant to an issue.
14. What is the capital requirement for carrying on activity as merchant banker.
The capital requirement depends upon the category. The minimum net worth requirement for acting as merchant banker
is given below:
Category I – Rs. 5 crores, Category II – Rs, 50 lakhs, Category III – Rs. 20 lakhs, Category IV – Nil.
15 What you mean by SEBI?
Securities and Exchange Board of India is a body corporate with head office at Bombay. The Chairman and the board
members are appointed by the Central government.
16.What are the major functions of SEBI.
SEBI has two major functions. They are :
1. Regulatory
a. Registering the brokers and sub-brokers ,(b) Registration of mutual funds,(c). Regulation of stock exchanges
d. Prohibition of fraudulent and unfair trade practice,(e) Controlling insider-trading, take-over bids and imposing
penalties
2. Development
a. Educating investors,(b) Training intermediaries in stock market transactions,(c) Promoting fair transactions
d. Undertaking research and publishing useful information to all.
17.What you mean by lead managers
Bank or underwriting firm that coordinates the activities of an underwriting syndicate (of which it is the organizer and
a member) and plays the primary role in launch and sale of the issue of securities underwritten by the syndicate. Also
called lead underwrite
18. What are the major restrictions on appointment of lead managers?
Size of Issue Number of Merchant Bankers
Less than Rs. 50 Crores Two
Above Rs. 50 Crores but less than Rs.100 Crores Three
Above Rs. 100 Crores but less that Rs.200 Crores Four
Above Rs.200 Crores but less that Rs.400 Crores Five
Above Rs.400 Crores Five or more as agreed by SEBI
19. What are the major responsibilities of lead managers?
No lead manager shall agree to manage or be associated with any issue unless his responsibilities relating to the
issue mainly, those of disclosures, allotment and refund are clearly defined, allocated and determined and a statement
specifying such responsibilities is furnished to the Board at least one month before the opening of the issue for
subscription. Where there are more than one lead merchant banker to the issue the responsibilities of each of such lead
merchant banker shall clearly be demarcated and a statement specifying such responsibilities shall be furnished to the
Board at least one month before the opening of the issue for subscription.
20. Define Stock Exchange.
It is the market for exchange of stocks. ‘Stocks’ refers to the old securities i.e., those which have been already issued and
listed on a stock exchange. These securities are purchased and sold continuously among investors without the
involvement of companies. Stock exchange provides not only free transferability of shares but also makes continuous
evaluation of securities traded in the market.
21.what are the objectives of Stock Exchange?
The Objectives of stock exchanges are
1. Assisting in buying and selling of securities
2. Regulating the business of buying and selling or dealing in securities.
22. Various function of stock exchange.
1. Liquidity and marketability of Securities, 2.Safety of Funds, 3.Supply of Long term funds,
4. Flow of Capital to Profitable Ventures, 5.Promotion of Investment, 6.Marketing of New Issues.
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23. What you mean OTCEI?
Over the Counter Exchange of India
24. What you mean by NSE?
National Stock Exchange of India It is the screen based trading established to counter the influence of Bombay
Stock Exchange and to reduce the influence of certain powerful intermediaries in the stock market. Both securities of
companies and debt instruments are traded here.

16 Marks
1. Briefly explain the structure of Indian financial system.
According to Van Horne, financial system is defined as the purpose of financial markets to allocate savings
efficiently in an economy to ultimate users – either for investment in real assets or for consumption.
Thus the financial system mainly stands on three factors
1. ‘Money’ is the unit of exchange or medium of payment. It represents the value of financial transactions in qualitative
terms.
2. ‘Credit’, on the other hand, is a debt or loan which is to be returned normally with interest.
3. ‘Finance’ is monetary wealth of the state, an institution or a person. Comprising these factors in a systematic order
forms a financial system.
Functions
Functions of financial system are distributed from creation of money to efficient management. It is the sum total of the
functions of the various intermediaries.
The functions of financial system can be classified into two broad categories:
1. Controlling functions
2. Promotional functions.
Structure Of Indian Financial System
Financial system is a system of arranging different types of funds required for the
business. It deals about
(a) Financial Institutions
(b) Financial Markets
(c) Financial Instruments
(d) Financial Services
(A) FINANCIAL INSTITUTIONS
 Commercial Banks
 Co-Operative Banks
 Non-Banking Financial Intermediaries
(B) FINANCIAL MARKETS
 Capital Market
 Money Market
 Foreign Money Market
 Government Securities Market
(C) FINANCIAL INSTRUMENTS
 Negotiable Instruments
 Commercial Paper
 Bill of lading
 Letter of Credit
 Travelers’ Cheques
(D) FINANCIAL SERVICES

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  Factoring  Asset Liability Management
 Leasing  Housing Finance
 Forfaiting  Portfolio Finance
 Hire Purchase  Underwriting
 Credit Card  Credit rating
 Merchant Banking  Interest and Credit Swap
 Book Building  Mutual fund

2. What is merchant banking? Discuss in detail the various functions performed by merchant bankers.
A merchant banker as ,”any person who is engaged in the business of issue management either by making
arrangements regarding selling, buying or subscribing to the securities as manager, consultant, adviser or rendering
corporate advisory service in relation to such issue management”.
A merchant banker is one who is a critical link between a company raising fund and the investors.
Merchant banker is one who underwrites corporate securities and advices clients on issues like corporate mergers.
The merchant banker may be in the form of a bank, a company, firm or even a proprietary concern.
Merchant Banker understands the requirements of the business concern and arranges finance with the help of
financial institutions, banks, stock exchanges and money market.
3. Explain the SEBI regulation on merchant bankers.
SEBI has brought about a effective regulative measures for the purpose of disciplining the functioning of the
merchant bankers in India. The objective is to ensure an era of regulated financial markets and thus streamline the
development of the capital market in India. The measures were introduced by the SEBI in the year 1992. The
measures were revised by SEBI in 1997. The salient features of the regulative framework of merchant banking in
India are discussed below.
Registration of Merchant Bankers /Application for Grant of Certificate
An application by a person for grant of a certificate shall be made to the Board in Form A. The application shall be
made for any one of the following categories of the merchant banker namely:
1. Category I- To carry on any activity of the issue management, which will interalia consist of preparation of
prospectus and other information relating to the issue, determining financial structure, tie-up of financiers and final
allotment and refund of the subscription; and to act as adviser, consultant, manager, underwriter, portfolio manager.
2. Category II- To act as adviser, consultant, co-manager, underwriter, portfolio manager.
3. Category III- To act as underwriter, adviser, consultant to an issue.
4. Category IV- To act only as adviser or consultant to an issue.
5. With effect from 9th December, 1997, an application can be made only for carrying on the activities mentioned in
category I. An applicant can carry on the activity as underwriter only if he contains separate certificate of
registration under the provisions of Securities and Exchange Board of India (Underwriters) Regulations, 1993, and
as portfolio manager only if he obtains separate certificate of registration under the provisions of Securities and
Exchange Board of India (Portfolio Manager) Regulations, 1993.
Conformance to Requirements
Furnishing of Information
Consideration of Application
Capital Adequacy Requirement
Procedure for Registration
Renewal of Certificate
4. Explain the major functions of stock exchange?
According to Hastings, “Stock exchange or securities market comprises all the places where buyers and sellers of
stocks and bonds or their representatives undertake transactions involving the sale of securities’.
The Objectives of stock exchanges are
1. Assisting in buying and selling of securities
2. Regulating the business of buying and selling or dealing in securities.

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Functions of Stock Exchanges
1. Liquidity and marketability of Securities
2. Safety of Funds
3. Supply of Long term funds
4. Flow of Capital to Profitable Ventures.
5. Motivation for improved performance
6. Promotion of Investment
7. Reflection of Business Cycle
8. Marketing of New Issues
9. Miscellaneous Services
5. Explain the legal frame work of merchant bankers?
Merchants and banks are currently engaged in a wide-ranging struggle for control over payment systems. The
conflict is playing itself out in business practices, in banking regulation, in corporate governance, in corporate
restructuring, in securities offerings, and in the biggest antitrust litigation Yet, it is possible that the extraordinary
energy being spent in this fight is for naught, as the growth of national bank brands, technological developments,
and innovative business models are likely to result in a radical reshaping of the payments world. This chapter
reviews the factors behind the struggle between merchant banks and the law relating to it , the strategies adopted by
each.
OBJECTIVES
After reading the unit, you will understand:
Merchant banking legal and regulatory frameworks
Companies act
Provisions under companies act and merchant banking

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