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Merchant Banking GURUKUL COLLEGE OF

COMMERCE

EXECUTIVE SUMMARY ON MERCHANT


BANKING

Merchant banking an overview:-

Company raises capital by issuing securities in market. Merchant


bankers act as intermediaries between the issuer of capital and the ultimate
investor who purchase these securities.
Merchant banking……. is the financial intermediation that matches
the entities that need capital and those that have capital? It is function that
facilitates the flow of capital in the market.

Scope of merchant banking activities:-

Merchant banking activities helps:


• In channel sing the financial surplus of the general public into
productive investment avenues.
• To coordinate the activities of various intermediaries to the share
issue such the registrar, banker, advertising agency, printers,
underwriters, brokers etc.
• To ensure the compliance with rules and registration governing the
securities market.

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Functions of a merchant banker…..

The following comprise the main functions of a merchant banker:

1. Management of debt and equity offerings:-

This forms the main function of the merchant banker. He assists


the companies in raising funds from the market. The main areas of
work in this regard includes : instrument designing, pricing the issue,
registration of the offer document, underwriting support, and
marketing of the issue, allotment and refund, listing on stock
exchanges.

2. Placement and distribution:-

The merchant banker helps in distributing various securities like


equity shares ,debt instrument, mutual fund product, fixed deposit,
insurance products, commercial paper to name a few. The distribution
network of the merchant banker can be classified as institutional and
retail in nature. the institutional network consist of mutual fund,
foreign institutional investor, private equity funds, pension fund,
financial institution etc. the size of such a network represents the

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wholesale reach of the merchant banker. The retail network depends


on networking with investors.

3. Corporate advisory services:-

Merchant bankers offer customized solutions to their client’s


financial problems. The following are the main areas in which their
advice is sought.

4. Financial structuring:-

Includes determining the debt-equity ratio and gearing ratio for


the clients the appropriate capital structure theory is also framed.
Merchant banker also explores the refinancing alternatives of the
client and evaluate cheaper source of fund. Another area of advice is
habilitation and turnaround management. In case of sick units,
merchant banker may design a revival package in coordination with
banks and financial institution. Risk management is another area
where advice from a merchant banker is sought. He advice the client
on different hedging strategies and suggest the appropriate strategy.

5. Project advisory service:-

Merchant banker helps their clients in various stage of project


undertaken by the clients. They assist them in conceptualizing the
project idea in the initial stage. Once the idea is formed, they conduct

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feasibility studies to examine the viability of the proposed project.


They also assist the client in preparing different document like the
detail project report.

6. Loan syndication:-

Merchant banker arranges to tie up loans for their clients. These


take place in a series of steps. Firstly they analyze the pattern of the
clients cash flows, based on which the terms of borrowing can be
defined. Then the merchant banker prepares a detailed loan
memorandum, which is circulate to various banks and financial
institution and they are invited to participate in the syndicate. The
banks then negotiate the terms of lending on the basis of witch the
final allocation is done.

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Registration of merchant banker….

Registration with SEBI is mandatory to carry out the business of


merchant banking in India. An application should comply with the
following norms:

• The applicant should be a body corporate.

• The applicant should not carry on 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.

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• The applicant should not have been involved in any securities scam or
proved guilt for any offence.

• The applicant should have a minimum net worth of Rs.5 cores

INTRODUCTION

The history of origin and growth of merchant banking throughout the


world, as discussed in the forgoing paragraphs, has established, beyond
doubts, the fact that the role of the merchant banker had never been
determined. They had followed strategy of assuming different roles
according to the need of need of time to maintain their existence in the
business environment. This is one of the reasons that no fixed definition
cold be ascribed to “MERCHANT BANKING”.

Very commonly, the merchant banking has been defined as to what


a merchant banker does. This is well convinced definition that could be
given to any service oriented industry. The definition given by different
authors explaining the meaning of merchant banking revolved around the
role played by merchant banks. There role and scope of such role have
enlarged with the passage of time. The survey of the existing literature in
the foregoing pages reveals that merchant banking is a non-banking
financial activity resembling banking originated, grown and sustain in
European land, got enriched under American patronage and now being
rendered throughout the world by both banking and non-banking institution.

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Some of the definitions are discussed below to locate the practical meaning
of the term “merchant banking”. Dictionary meaning of merchant banking
hints at merchant banks as an organization that underwrites securities that
underwrites securities for corporations.

Dictionary meaning of merchant banking hints at merchant banks as


an organization that underwriters securities for operation advises such
clients on mergers and is involved in the ownership of commercial venture.
These organizations are sometimes banks which are not merchants and
sometimes merchants who are not banks and sometimes houses which are
neither merchants nor banks. These definition reflects the historical
formation of the merchant banking profession as such, in which the
merchants had assume banking role and subsequently banks assume the
merchant roles. Paul ferries rightly states this phenomenon; the original
label of ‘merchants and bankers was replaced by merchant bankers. There
name lent creditability involving the other people money.

In financial history of Western Europe, Charles P Kindle Berger writes


about merchant banking as the development of banking from commerce
frequently encountered a prolonged intermediate stage known in England
original as merchant banking. The merchant banker was a banker was a
merchant who lent his credit to others. This was done in various ways viz.
making advance to produces before goods were sold, either the goods
entrusted to merchant on commission for sale abroad or received on
consignment from abroad, by issuing letters of credit under which
merchants could draw bills of exchange created by trade. Most merchant

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banks drifted from generalized commerce into specified commerce and


from specialized commerce into finance.

Merchant Banks, thus, in essence, are financial institution providing


specialist services which generally include the acceptance of bill of
exchanges, corporate finance, portfolio management and other banking
services. It is not necessary that a merchant banker should do all such
activities to be called a merchant bankers, one merchant bank may
specialized in one activity only, and take up other activities also, which may
be complimentary or supportive to specialized activity. For example, firms
in England which are engaged in the business of acceptance of bills are
known as merchant bankers. Again, the firm which are members of the
issue House Committee in England (not necessarily be engaged in the
former activity) are also merchant banks. Thus, merchant banks despite
specialization in one activity have different roles to play in different
economic situation.

Merchant Banking is an emerging concept in the area of financial


services in India. The profession of Merchant Banking is dedicated to fulfill
the needs of trade and industries by acting as an intermediary, consultant,
liaison man and financer too. Merchant banking is a result oriented
profession commanding high degree of skills and dexterity in solving
business problems, assisting in investments and financial decision making,
assisting in laying corporate strategies, assessing capital needs and
helping in producing the owed as well as borrowed funds for achieving
balanced capital structure of the client corporate un its. Merchant’s banker’s

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with the confidence of investors and general public command high


reputation for passing on accurate, adequate and timely information which
helps and facilities in the functioning of capital markets, money markets &
international financial system. Merchant Bankers observe their skill as
personal possession for their comparative strengths in the profession.

Definition

“ A merchant bank is a defined as a financial institution or an


organization that underwrites corporate securities and advice such clients
on issue like corporate mergers etc involved in the ownership of
commercial venture, etc. this organization may be bank corporate body, a
firm or a priority concern”

Merchant banking in India started with management of public


issues and loan syndication and has been slowly and gradually covering
activities like “project counseling”, “portfolio management” and mergers
and amalgamation of corporate firm.

A merchant banker has been defined under the securities and


exchange board of India [merchant banker] rules,1992 as “any person who
is engaged in the business of issue management either by making
arrangements regarding selling, buying or subscribing securities as

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manager, consultant, advisor or rendering corporate advisory service in


relation to such issue management.

Origin of Merchant Banking

The origin of merchant banking is traceable with the development of


inters a national trade and finance. Economic literature available on
international trade and finance contains lucid information on the evolution of
merchant banking and make a fascinating reading that provides the
historical background of origin of merchant banking.

During 13th century a few families owned and managed firms


engaged in coastal trade and finance were spread throughout the
European continent. The first known such firms were Ricardo of Lucca,
Medici and fogger. These firms besides their commercial activity involving
sale and purchase of commodities were engaged in banking activity also.
These firms had acted as the bankers to the kings of European status,
financing costal trade amongst European nation, borne exchange risk in the
absence of any international medium of exchange in addition to the security

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risk in financing the king, monarchs and the state government engaged in
the continental wars. The motivation behind their banking activity was profit
maximization and to achieve this aim they invested their funds were they
expected higher return despite high degree of risk. For this reason,
merchant bankers used to charge rate of return for financing, the highly
risky venture. In turn, they had to suffer, very often, with heavy losses,
closed down for reasons of denial of, repayments, denouncements of
obligations by debtors, credits losses and confiscations of their properties
by the kings they financed. For example, Ricardo of Lucca, the Italian
merchant banker, had opened an office in England to serve the English
Government of Edward-I of England and had to succumb to closure when
kings confiscate its properties on its refusal to finance the war in
1924.similarly, the Medici bank of Florence was liquidate in 1494, Fugger
banker had to suffer in 1650 when Habsburg Emperors Maximillan and
Charles- V deflated in payments. There are numerous instances likewise
where, and then the existing merchant banker had to collapse, leave the
activity or started another activity or started the same activity after
strengthening the financing background. Thus, merchant banking, with all
the odds, survived and continued during thirteen and sixteen centuries.

The main trading center for world trade and during the above period
had remained in Amsterdam where the Dutch trader relied, on the finance
of trade, upon the expertise of merchant banker, then known as
“commission agent”. The important service they rendered including
handling of the costal trade and for their masters goods on commission
basis, financing the owners or suppliers of the goods and the shipping

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agencies by expounding their payment obligations by accepting credit in


addition to the direct financing. These commission agents did big business
by making small investment in the goods manufactured by the sellers and
thus accumulated huge wealth. This gives a fillip to merchant banking
activities and involves them in acts of lending in addition to doing the jobs
on commission basis. The main borrowers of their funds were crowns,
emperors and state government, as started earlier, to whom these
merchant banker continued lending for reasons of patronage, recognition
and higher expectation, despite the suffering, at their hands and by their
fellow trader. During the 17th centuries also, the
Dutch trader and banker lent heavily to finance continental wars,
William of England borrowed huge sums in Amsterdam to fight the
continental wars. Many European states

Including Germany, Russia and Sweden had borrowed in Amsterdam


such huge sums during beginning of the 18th century. During Napoleonic
war, margrave of hassle, the richest merchant of Europe, had financed the
germane prince: jaws of Kassel and Frankfurt made loans to the rulers in
the name of, banker. This risky investment was made with the sole
objective of profit maximization by the merchant banker.

The industrial revolution in England gave further boost to the


merchant banking activity with the growth of the home industry made goods
like linen and paper. The scope of international trade and expanded to the
colonies of the new world. That is the North America and other continents.
Many more persons and firms were attracted to take up the merchant

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banking activities particularly to transship the machine made goods from


European nations to other nations, developing colonies of the European
nation in other continents and bringing raw material from other nations and
colonies to Europe, and to finance such trade.

The founders of the several of the present day merchant banks who
started the business having the 18th century and early 19th century were the
merchants who traded overseas and earned reputation with their name.
These prominent merchants were requested to lend their name to the
lesser known traders by accepting a bills they guaranteed that the holder of
bill will receive the full value on the date of payment. This acceptance
business has grown with the expansion of the trade through the European
nations and continuous today the banks most activity engaged in it are the
number of the acceptance house committee of London.

The merchant banker traded for centuries and retained their names
and activities in different nations by expanding their activities. For example,
in Amsterdam, john & co. were bankers in 18th century and at the same
time engaged in trading of all commodities they could sell at a profit. In
Frankfurt, Meyer mashes Rothschild traded coffee, sugar, tobacco, along
with the British manufactures.

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Growth of merchant banking in India

Merchant banking activities in India originated in 1969 with the


merchant banking division set up by the grind lay bank, the largest foreign
bank in the country, at the time. The main service offer to the corporate
enterprises by the merchant bank includes management public issue and
financial consultancy. Other forcing bank like city bank, chartered bank also
assumed the merchant banking activity in India. State bank of India started
merchant banking in 1973 followed by the ICICI in1974; both emerged as
leader in merchant banking with significance business during the period of
1974-1985 in comparison to forcing banks. Mid seventies witnessed a
growth of merchant banking organization in the country with various
commercial banks, financial institutions, broker firms entering in to the field
of merchant banking.

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The growth in merchant banking business during the early seventies


was to forcing exchange regulation act 1973 [ FERA] where in large
number of forcing companies operating in India were required to dilute their
foreign holdings In order to continue business in the country his result in
expansion in the capital markets providing enough opportunities to
merchant bankers to established themselves. The change in Indian
economy opened new doors for merchant banking business enter in
diversified area of activities, but at the same time this brought competition
in merchant banking sector. This sector has traditionally been dominated by
financial institution, banks and their subsidiaries. Now, various private
sectors merchant bankers have emerged and some of them having
international reputation. Till the end of 1990, the merchant banking sector
was almost monopoly public sector institution and commercial banks,
however since 1991 considerable number of private merchant banker have
emerged on same. Various existing corporate entities and non-banking
finance companies have also focused their activities in merchant banking
business. Before 1990 there were less than 40 merchant banking concerns
while in 199 this number has exceeded to more than 400 firms.

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Importance and need of Merchant Banking in


India

Importance reasons for the growth of merchant banks has been


development activities throughout the country, exerting excess demand on
the sources of fund for ever expanding industries and trade, thus leaving a
widening gap unabridged between the supply and demand of invisible
funds. All India financial institution had experienced constrain of resources
to meet ever increasing demands for demands for funds frame corporate
sector enterprises. In such circumstances corporate sector had the only
alternative to avail of the capital market service for meeting their long term
financial requirement through capital issue of equity shares and

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debentures. Growing demand for funds put pressure on capital market that
enthused commercial banks, share brokers and financial consultancy firms
to enter into the field of merchant banking and share the growing capital
market. As a result all the commercial banks in nationalized and public
sector as well as in private sector including foreign banks in India have
opened their merchant banking windows and competing in this field.

Need for merchant banking is felt in the wake of huge public saving
lying untapped. Merchant banker can play highly significant role in
mobilizing funds of savers to invisible channels assuring promising returns
on investment and thus can assist in meeting the widening demand for
invisible funds for economic activity. With growth of merchant banking
profession corporate enterprises in both private sectors would be able to
raise required amount of funds annually from the capital market to meet the
growing requirement for funds for establishing new enterprises, undertaking
expansion, modernization and diversification of the existing enterprises.
This reinforces the need for a vigorous role to be played by merchant
banking.

In view of multitude of enactment, rules and regulation, gridlines and


offshoot press release instructions brought out the government from time to
time imposing statutory obligations upon the corporate sector to comply
with those entire requirement prescribed there in the need of a skilled
agency existed which could provide counseling in these matters in a
package form. A merchant banker with their skills updated information and
knowledge provide this service to the corporate units and advice them on

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such requirement to be complied with for raising funds from the capital
market under different enactment viz. companies act, income tax act,
foreign exchange regulation act, securities contracts corporate laws and
regulations. Merchant bank advice the investors of the incentives available
in the form of tax relief, other statutory relaxation, good return on
investment and capital appreciation in such investment to motivate them to
invest their savings securities of the corporate sector. Thus merchant banks
help industries and trade to rise and the investors to invest their saved
money in sound and healthy concern with confidence, safety and
expectation for higher yields. Finance is the backbone of business
activities. Merchant banker make available finance for business
enterprises acting as intermediaries between them raising demand for
funds and the supplies of funds besides rendering various other services.

The following are some of the reasons why specialist merchant bank
have a crucial role to play in India.

1. Growing complexity in rules and procedures of the government.

2. Growing industrialization and increase of technologically advanced

industries.

3. Need for encouragement of small and medium industrialists, who require


specialist services.

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4. Need to develop backward areas and states which require different


criteria.

5. Exploring the possibility of joint ventures abroad and foreign market.

6. Promoting the role of new issue market in mobilizing saving from.

Where merchant banks function as an independent wing or as


subsidiary of various private/central governments/ state government
financial institution. Most of the financial institution in India is in public
sector and therefore such setup plays a role on the lines of governmental
priorities and policies.

REGISTRATION PROCESS OF MERCHANT


BANKING

MERCHANT BANKER without holding a certificate of registration


granted by the Securities and Exchange Board of India cannot act as a
merchant banker.

SEBI will grant certificate to Merchant banker if it follows the following


condition:-

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 Merchant banker should be a body corporate and should not be non


banking finance company

 They must have a necessary infrastructure for maintaining an office

 They must have employed a minimum of 2 persons with experience in


merchant banking business.

 They should not be connected with any company directly or indirectly.

Procedure for getting registration

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Failing to pay
registration
fees

Cancellation
of certificate

Obligations and responsibilities

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 Code of conduct:-

Every merchant banker has to abide by the code of conduct as


specified below. A merchant banker in the conduct of his business has
to observe standards of integrity and fairness of all his dealings with the
clients and other merchant bankers. He ought to render at all times high
standards of service, exercise due diligence, ensure proper care and
exercise independent professional judgment. He has to, wherever
necessary, disclose to his clients, the possible sources of conflict of
duties and interest, while providing services. He cannot made any
statement or become privy to any act, practice unfair competition, which
is likely to be harmful to interest of other merchant bankers or is likely to
place such other merchant banker in a disadvantageous position in
relation to him, while competing for, or executing, any assignment. He
should not make any exaggerated statement, whether oral or written, to
the client either about his qualification or his capability to other clients. A
merchant banker always to endeavors to:

1) Render the best possible advice to the clients regarding clients the
needs and requirements, and his own professional skill; and
2) Ensure that all professional dealing are affected in prompt, efficient
and cost effective manner

 He should not:-

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1) Divulge to other clients, press or any other party any other party
confidential information about his client, which has come to his knowledge;
and

2) Deal in the securities of any client company without making


disclosure to the SEBI as per the regulations and also the Board of
Directors of the client company.

 He should endeavor to ensure that:-

1) The investors are provided with true and adequate information


without making any misguided or exaggerated claims, and are made
aware of attendant risks before any investment decision is taken by them;

2) The copies of prospectus, memorandum and related literature are


made available to the investors

3) Adequate steps are taken for the fair allotment of securities and
refund of application money without delay; and

A merchant banker should not generally and particularly in respect of


the issue of any securities be part to

a) Creation of false market;


b) Price rigging or manipulations; and

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c) Passing of price sensitive information to brokers, members of stock


exchanges and other players in the capital market or take any other action
which is unethical or unfair to the investors.

Finally, he has to avoid by the provisions of the SEBI Act, its rules
and regulations which may be applicable and relevant to the activities
carried on by the merchant banker.

 Restriction on Business:-

No merchant banker, other than a bank/public financial


institution (PFI) is permitted to carryon business other than that just in
the securities market with effect from December 9, 1997.

However, a merchant banker who is registered with RBI as a


Primary Dealer/Satellite Dealer may carry on such business as may be
permitted by RBI with effect from November 1999.

 Maximum Number of Lead Managers :-

The maximum number of lead manager is related to the size


of the issue. For an issue of size less than Rs.50 crore, two managers are
appointed. For size groups of Rs.50 crore to Rs.100 crore and Rs.100 corer

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to Rs.200 crore, the maximum permissible lead managers are three and
four respectively. A company can appoint five and five or more (as
approved by the SEBI) lead managers in case of issues between Rs.200
corer and above Rs.400 crore respectively.

 Responsibilities of Merchant Banker:-

Every lead manager has to enter into an agreement with the


issuing companies setting out their mutual rights, liabilities, and obligation
relating to issue and in particular to disclosures, allotment and refund. A
statement specifying these is to be furnished to SEBI at least one month
before the opening of the issue for subscription. In case of more than one-
lead manager/Merchant banker, the statement of has to provide details
about their respective responsibilities. A lead merchant banker cannot
manage an issue if the issuing company is its associate. He can also not
associate with a merchant banker who does not hold a certificate of
registration with the SEBI. It is necessary for a lead manager to accept a
minimum underwriting obligation of 5% of the total underwriting
commitment or Rs.25 lakh whichever is less. If he is unable to do so, he
has to make arrangements for an underwriting of an, equal amount by a
merchant banker associated with that issue under intimation to SEBI.

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 Due Diligence certificate:-

The lead manager is responsible far the verification of the


content of a prospectus/letter of offer in respect of an issue and the
reasonableness of the views expressed in them. He has to submit to the
SEBI at least two weeks before the opening of the issue far subscription a
due diligence certificate to the effect that

a) The prospectus/letter of after is in conformity with the


documents/materials and papers relevant to the issue,

b) All legal requirements connected with the issue have been fully
complied with, and

c) The disclosure is true, fair and adequate to enable the


investors to make a well-informed decision as to the
investment in the proposed issue.

 Submission of Documents:-

The lead managers(s) to an issue has (have) to. Submit at least two
weeks before the date of filing with the registrar of companies/regional
stock exchange or both particulars of the issue, draft prospectus/letter of

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offer, other literature to be circulated to the investors/shareholders, and so


an to the SEBI. They have to ensure that the modifications/suggestion
made by it with respect to the information to be given to the investors is
duly incorporated. The draft prospectus/draft letter of offer should be
submitted to the SEBI along with the prescribed fee specified below:-

Issue size including premium and


Fee per document
intended retention oversubscription

Up to Rs.5 crore Rs 10,000

Rs 5 crore- Rs 10 crore Rs 15,000

Rs 50 crore- Rs 50 corer Rs 25,000

Rs 10 crore- Rs 100 corer Rs 50,000

Rs 100 crore- Rs 500 corer Rs 2,50,000

More than Rs 500 corer Rs 5,00,000

They have to continue to be associated with the issue till the


subscribers have received the share debentures certificate or the refund of
excess application money.

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Acquisition of shares a merchant banker is prohibited from acquiring


securities of any company on the basis of unpublished price sensitive
information obtained during the course of any professional assignment
either from the client or otherwise. He has to submit to the SEBI the
complete particulars of any acquisition of securities of a company whose
issue is being managed by him within 15 days from the date of the
transaction.

 Disclosures to SEBI:-

As and when required, a merchant banker has to disclose to the


SEBI:

I) His responsibilities with regard to the management of the


issue,
II) Any changes in the information/particulars previously furnished which
have a bearing and the certificate of registrations granted to it.
III) The names of the companies whose issues he has managed or has
been associated with,
IV) The particulars relating to breach of capital adequacy requirements
and
V) Information relating to his activities as manager, under writer,
consultant or adviser to an issue.

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 Procedure for Inspection:-

The SEBI can undertake the inspection of the books of accounts,


records, and documents of a merchant banker to ensure that the books are
maintained in the manner required, the provision of the SEBI Act, rules and
regulations are being camp lied with, and to investigate complaints from
investors/other merchant bankers/any other person or any matter having a
bearing on his activities, as a merchant banker and suo moto in the interest
of securities business/investors interest into the affairs of the merchant
banker.
The merchant banker has an obligation to furnish all the information
called for, allow a reasonable access to the premises, extend reasonable
facility for the examination of books/records/documents/computer data and
provide copies of the some and give all assistance to the inspecting
authority in connection with the inspection.

On the basis of the inspection report and after giving him an


opportunity to make an explanation, the SEBI can all upon the merchant
banker to take such measures as it deems fit in the interest of the securities
market and for due compliance with the provisions of the SEBI can appoint
a qualified auditor with the above powers of the inspection committee to
investigate into the books of accounts or the affairs and obligations of the
merchant banker.

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 Action in Case of Default:-

A merchant banker who fails to comply with any conditions subject


to which the certificate of registration has been granted has been granted,
by the SEBI and/or contravenes any of the provisions of the SEBI Act, rules
or regulations, is liable to any of the two penalties:

a) Suspension of registration or
b) Cancellation of registration

 Suspension of Registration:-

A penalty of suspension of registration of merchant banker maybe


imposed where the merchant banker

1) violates the provisions of the SEBI Act, rules or regulations;


2) (a) Fails to furnish any information relating to his activity as
Merchant banker as require
(b) Furnishes wrong or false information;
(c) Does not submit periodical returns as required by the SEBI;
(d) Does not cooperate in any enquiry conducted by the SEBI;

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3) Fails to resolve the complaints of the investors or fails to give a


Satisfactory reply to the SEBI in this behalf;
4) Indulges in manipulating or price rigging or cornering activities;
5) Is guilty of misconduct or improper or unfussiness like or unprofessional
conducted which is not in accordance with the code of conduct under the
regulations;
6) Fails to maintain the capital adequacy requirement in accordance with
the provisions of the regulations;
7) Fails to pay the fees;
8) Violates the conditions of registration; and
9) Does not carry out his obligations-as specified in the regulation.

 Cancellation of Registration:-

A penalty of cancellation of registration of a merchant banker may


be imposed where:
1. The merchant banker indulges in deliberate manipulation or price rigging
or cornering activities affecting the securities market and the investor’s
interest
2. The financial position of the merchant banker deteriorates to such an
extent that SEBI is of the opinion that his continuance as merchant
banker is not in the interest of investors
3. The merchant banker is guilty of fraud, or is convicted of a criminal
offence and

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4. In case of repeated defaults of the nature leading to suspension of


registration provided that the SEBI flourish reasons for cancellation in
writing.
On and from the date of suspension and cancellation of registration of
the merchant banker, he ceases to carryon any activity as a merchant
banker. The order of suspension of cancellation of certificate is published in
at least two daily newspapers by the SEBI.

 Default by Merchant Bankers and Penalty Points:-

The SEBI imposes penalties for non-compliance for registration


and contravention of the regulations on the basis of which registration is
suspended/cancelled. The defaults are categorized into
(a) General,
(b) Minor,
(c) Major and
(d) Serious.

General defaults for the purpose of penalty points, the following activities
are classified under general defaults and attract one penalty point.
1) Non-receipt of draft prospectus/letter of offer from the lead manager by
SEBI, before filing with the registrar of companies/stock exchange
2) Non-receipt of interest allocation of responsibilities of lead managers in
an issue by SEBI prior to the opening of issue.

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3) Non-receipt of due diligence certificate in the prescribed manner by


SEBI, before opening of the issue.
4) Failure to ensue the submission of certificate of minimum 90%
subscription to the issue.
5) Failure to ensure expediting of dispatch of refund orders,
shares/debentures certificate, filing of listing application by the issuer.

 Minor Defaults:-

The following activities are categorized under minor defaults and


attract two penalty points.

a. Advertisement, circular, brochure, press release and other issue related


materials not being in conformity with the contents of prospectus.
b. Exaggerated information or information extraneous to the prospectus is
given by issuer or associated merchant baker in any press conference,
investor’s conference, broker’s conference or other such
conference/meet prior to the issue for marketing of the issue for
marketing of the issue arranged/participated by the merchant banker.
c. Failure to substantiate matters contained in highlights to the
prospectus.
d. Violation of regulations relating to advertisement on capital issues.
e. Failure to exercise due diligence in verifying the contents of prospectus
letter of offer.

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f. Failure to provide adequate and fair disclosure to investors and


objective information about risk factors in the prospectus and other
issue literature.
g. Delay in refund/allurement of securities.
h. Non-handling of investors grievances promptly.

 Major Defaults:-

The following activities are categorized under major defaults and


attract three penalty points.

a) Mandatory underwriting not takes up by the managers


b) Excess number of lead managers than permissible.
c) Association of unauthorized merchant banker in an issue.

 Serious Defaults:-

The following activities are categorized under serious defaults and


attract four penalty points:
1) Unethical practice by a merchant banker and/or violation of Code of

conduct.
2) Non-cooperation with SEBI in furnishing desired Information,
documents, evidence as may be called for.

A merchant banker on reaching cumulative penalty points of eight


attracts action from SEBI in terms of suspension/cancellation of

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authorization. To enable a merchant banker to take corrective action, the


maximum penalty points awarded in a single issue managed by a merchant
banker are restricted to four. In the event of joint responsibility, the same
penalty point is awarded to all lead managers. In the absence of receipt of
inter se allocation of responsibilities, all lead managers to the issue are
awarded the penalty points.

 Defaults in Prospectus:-

In the highlights are provided, the following deficiencies attract


negative points.
I. Absence of risk factors
II. Absence of listing
III. Extraneous contents to prospectus, if stated

The maximum grading points of prospectus can be 10 and


prospectuses scoring greater than or equal to 8 points are categorized as
A+, those with 6 or less than 8 points as A, those with 4 or less than 6
points as B and those with score of less than 4 points, the prospectus falls
in category C.

 General Negative Marks:-

If all highlights are provided in an issue-

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a) Risk factors should from part of highlights,-otherwise it attracts a


negative points of-1
b) Listing details, should form of part of highlights, otherwise it attracts a
negative point of-OS
c) Any matter extraneous to the contents of the prospectus, if stated in
highlights attracts a negative point of -0.5.

Organizational set up of Merchant Bankers in


India

In India a common organizational set up of merchant bankers to


operate is in the form of divisions of Indian and Foreign banks and financial
institutions, subsidiary companies established by bankers like SBI, Canada
Bank, Punjab National Bank, Bank of India, etc. some firms are also
organized by financial and technical consultants and professionals.
Securities and exchanges Board of India has divided the merchant bankers
into four categories based on their capital adequacy. Each category is
authorized to perform certain functions. From the point of Organizational
set up India’s merchant banking organizations can be categorized into 4
group on the basis of their linkage with parent activity. They are:

a) Institutional Base:-

Where merchant banks function as an independent wing or as


subsidiary of various Private/Central Governments/State Governments

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Financial institutions. Most of the financial institutions in India are in public


sector and therefore such set up plays a role on the lines of governmental
priorities and policies.

b) Banker Base:-

These merchant bankers function as division/ subsidiary of banking


organization. The parent banks are either nationalized commercial banks or
the foreign banks operating in India. These organizations have brought
professionalism in merchant banking sector and they help their parent
organization to make a presence in capital market.

c) Broker Base:-

In the recent past there has been an inflow of Qualified and


professionally skilled brokers in various Stock Exchanges of India. These
brokers undertake merchant baking related operating also like providing
investment and portfolio management services.

d) Private Base:-

These merchant banking firms are originated in private sectors.


These organizations are the outcome of opportunities and scope in
merchant banking business and they are providing skill oriented specialized
services to their clients. Some foreign merchant bankers are also entering
either independently or through some collaboration with their Indian

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counterparts. Private Sectors merchant banking firms have come up either


as sole proprietorship, partnership, private limited or public limited
companies. Many of these firms were in existence for quite some time
before they added a new activity in the form of merchant banking services
by opening new division on the lines of commercial banks and All India
Financial Institution (AIFI).

Scope of merchant banking services in India

Merchant banking is a service oriented industry. The services


rendered by merchant banks to the corporate client in India are more or
less the same which are, being rendered traditionally in U.K and other
European countries by the merchant banks in U.S.A by the investment
bankers to carter to the needs of the business enterprises. India’s economy
is in the state of transition facing an entirely different environment than that
faced by the developed nations of the world. In view of these
circumstances, a mark of distinction is apt to be noted in the nature and the
type of services being offered by the merchant banks in India.

Following services provide by the merchant bankers in India:-

1. Project Counseling
2. Loan Syndication

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3. Management Of Capital Issues


4. Dealing In Secondary Market
5. Mutual Funds
6. Portfolio Management
7. Underwriters
8. Mergers / Amalgamations

PROJECT COUNSELLING

Project counseling services may be rendered independently or


maybe, it relates to project finance and broadly covers the study of the
project and offering advisory assistance on the project viability and
procedural steps for its implementation broadly including following aspects:-
general review of he project ideas/ project profile, advice on procedural
aspects of project implementation, review of technical feasibility of the
project on the basis of the report prepared by own experts r by the outside
consultants, selecting Technical consultancy Organization (TCO) for
preparing project reports and market survey, or review of the project reports
or market survey report prepared by the TCO, preparing project report form
financial angle, and advice and act on various procedural steps including
obtaining government consents for implementation of projects. This
assistance can include obtaining of the following
approvals/licenses/permission/grants etc form the govt. agencies viz. letter

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of intent, industrial license and DGTD registration and government approval


for foreign collaboration.

In addition to above, the facility providing guidance to Indian


entrepreneurs for making investment projects in India and in Indian joint
ventures overseas is also covered under this activity.

Besides the above services, project counseling may include


identification of potential investments avenues, precise capital structuring
shaping the pattern of financing, arranging and negotiating foreign
collaborations, amalgamations, mergers and takeover, financial study of the
project and preparation of viability reports, to advice on the framework of
institutional guidelines and laws governing corporate finance, assistance in
the preparation of project profiles and feasibility studies based on
preliminary project ideas in order to indicate the potential. These reports
would cover the technical, financial and economic aspects of the project
from the point of view of their acceptance by the financial institutions and
banks; advising and assisting clients in preparing the applications for
obtaining letters of intent, industrial license and DGTD registrations etc,
seeking approvals from the government of India for foreign technical and
financial collaboration agreements, guidance on investment opportunities
for entrepreneurs coming to India.

Pre-investment studies are directed mainly for the prospective


investor. These are the objective and detailed feasibility explanation of
which the principal aim is to arm the clients with the sound foundation of

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facts and figures to evaluate the alternative avenues open for capital
investments from the point of view of growth and profit prospects. Some of
the critical issues that a study of this genre deals will include an in-depth
investigation of environment and regulatory factors, location of raw
material, supplies, demand projections and financial requirements. Such a
study would assess the financial and economic viability of a given project
and help the clients to identify and short list those projects that are built
upon his inherent strength son as to accentuate corporate profitability and
growth in long run.

Grind lays bank has specialization in pre investment studies and it


conducts such studies for foreign companies’ wishing to participate in joint
ventures in India and offers a package of services including advice on the
extent of participation, government regulatory factors and an environmental
scan of particular industries in India

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LOAN SYNDICATION

Credit syndication also known as credit procurement and project


finance services. The main task involved in credit syndication is to raise to
rupee and foreign currency loans with the banks and financial institutions
both in India and abroad. It also arranges the bridge finance and the
resources for cost escalations or cost Overruns.

Broadly, the credit syndications include the following acts;

(a) Estimating the total costs


(b) Drawing a financing plan for the total project cost-conforming to the
requirements of the promoters and their collaborators. Financial
institutions and banks, government agencies and underwriters.

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(c) Preparing loan application for financial assistance from term


lenders/financial institutions/banks and monitoring their progress including
the pre-sanction negotiations.
(d) Selecting the institutions and banks for participation in financing.
(e) Follow-up of the term loan application with the financial institutions and
banks and obtaining the satisfaction for their respective share of
participation.
(f) Arranging bridge finance.
(g) Assisting in completion of formalities for drawl of term finance sanctioned
by institution expediting legal documentation formalities drawing up inter-
se agreements etc. prescribed by the participating financial institutions
and banks.
(h) Assessing the working capital requirements.

Preparing the necessary application for a successful issue management


the close liaison and coordination with the various constituents of the public
issue is an essential condition that warrants full cooperation of all the
parties affecting the cost and prospects f the issue. Merchant banks, acting
as ‘Manager’ to the issue has to settle the fee for Advocate/solicitors’
advice, accountants certification, broker’s and banks charges, underwriters’
commission, printers’ charges and advertising and publicity expenses and
coordinates with syndicated merchant bankers and principal brokers, stock
exchanges, etc. The responsibility for all this rests upon the merchant
banker. If proper coordination is not done, the success of the issue may be
rendered unasserted.

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Management OF Capital ISSUES

The capital issue are managed are category-1 merchant banker and
constitutes the most important aspects of their services. The public issue of
corporate securities involves marketing of capital issues of new and
existing companies, additional issues of existing companies including rights
issue and dilution of shares by letter of offer,. The public issues are
managed by the involvement of various agencies i.e. underwriters, brokers,
bankers, advertising agency, printers, auditors, legal advisers, registrar to
the issue and merchant bankers providing specialized services to make the
issue of the success. However merchant banker is the agency at the apex
level than that plan, coordinate and control the entire issue activity and

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direct different agencies to contribute to the successful marketing of


securities. The procedure of the managing a public issue by a merchant
banker is divided into two phases, viz;

(A) Pre-issue management


(B) Post-issue management

(A) Pre-Issue Management:-

Steps required to be taken to manage pre-issue activity is as follows:-


(1) Obtaining stock exchange approvals to memorandum and articles

of associations.
(2) Taking action as per SEBI guide lines
(3) Finalizing the appointments of the following agencies:
• Co-manager/Advisers to the issue
• Underwriters to the issue
• Brokers to the issue
• Bankers to the issue and refund Banker
• Advertising agency
• Printers and Registrar to the issue

(4) Advise the company to appoint auditors, legal advisers and broad

base Board of Directors


(5) Drafting of prospectus

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(6) Obtaining approvals of draft prospectus from the company’s legal


advisers, underwriting financial institutions/Banks
(7) Obtaining consent from parties and agencies acting for the issue
to be enclosed with the prospectus.
(8) Approval of prospectus from Securities and Exchange Board of
India.
(9) Filing of the prospectus with Registrar of Companies.
(10) Making an application for enlistment with Stock Exchange
along, with copy of the prospectus.
(11) Publicity of the issue with advertisement and conferences.
(12) Open subscription list.

(B) Post-issue Management:-

Steps involved in post-issue management are:-


(1) To verify and confirm that the issue is subscribed to the extent of
90% including devolvement from underwriters in case of under
subscription
(2) To supervise and co-ordinate the allotment procedure of registrar
to the issue as per prescribed Stock Exchange guidelines

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(3) To ensure issue of refund order, allotment letters / certificates


within the prescribed time limit of10 weeks after the closure of
subscription list
(4) To report periodically to SEBI about the progress in the matters
related to allotment and refunds
(5) To ensure he listing of securities at Stock Exchanges.
(6) To attend the investors grievances regarding the public issue

The Merchant Bankers for managing public issue can negotiate a fee
subject to a ceiling. This fee is to be shared by all lead managers,
advisers etc.
0.5% of the amount of public issues up to Rs.25 crores 0.2% of the
amount exceeding Rs.25crores, if more than one Merchant bankers are
managing the issue.

MUTUAL FUNDS

A Mutual Fund is a special type of investment institution which


collects or pools the savings of the community and invests large funds in
variety of Blue-chip Companies which are selected from a wide range of
industries with the objects of maximizing returns/incomes on investments.
E.g. Unit Trust of India (UTI), Sri Ram Mutual Fund, Morgan Stanley

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Growth Fund (foreign mutual fund), etc. Mutual Funds are basically a trust
which mobilize savings from the people and invest them in a mix of
corporate and government securities. Money collected by the investors is
invested in various issues of primary and secondary markets in order to
gain profits on such investments.

It is a Trust, which combines the investments of various investors


having similar financial goals. The Trust issues units to the investors in the
proportion of their investments. A fund manager then invests these funds in
different types of assets, which provide returns in the form of dividends,
interests, and capital appreciation. This is distributed to the various
investors in the proportion of their contribution to the pool funds.

Ordinary investors, who want to invest their savings, neither


understand the complexities of financial markets nor have the time to
watch, research, and analyses different equities, securities or any other
investments opportunities that are available in the market.

At present, all the markets viz. the debt market, the equity market, the
money market, real estates, derivatives, and the market dealing with the
other assets have now reached a stage where a minimal information affect
the markets. Besides this, the economy has opened up and global events
influence their performance.

It is very difficult for a lay person to keep track of various investments,


transactions, brokerages etc.

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In the present scenario mutual funds are some of the most efficient
financial instruments as it offers above services like managing investments
at a very low cost.

Benefits of Investing in Mutual Funds

1) Professional management of the investments:-

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Each Mutual fund appoints an experienced and professional


funds manager and several research analyst, who research before
investing, thus adding value to the common investor. These
professional constantly keep track of the market changes and news,
predict the impact they will have on the investments and take quick
decision regarding the adjustments to be made in the portfolio.

2) Low costs of Investments:-

Due to the large amount of funds manages, very low costs


accrue per investor. Mutual fund achieves economics of scales in
research, transactions and investments. It lowers the cost of
brokerage, custodial and other charges.

3) Diversification :-

A common investor has limited money, which he can invest only


in a few securities and faces a great risk. If their values go down, the
investor loses all his money. Since Mutual Funds have huge amounts
of funds to invest, the Fund manager invests in the securities of many
industries and sectors;(called diversifying the risk). This diversification
reduces the risk involved because all the sectors and industries will
never go down at the same time. Investors get this diversification by
investing a small amount in Mutual Funds.

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4) Convenient record keeping and administration: -

Mutual funds take care of all record keeping including


paperwork. It also deals with the problem of bad deliveries, broker’s
commission etc.

5) Various types of Schemes:-

Mutual Funds offer various types of schemes such as regular


income plan, growth plan, equity funds, debt Funds, and balanced
Funds. So investors can select a plan according to his needs.

6) Flexibility:

mutual funds offers various schemes, giving the investor the


option to shift from one scheme to another at various times
depending on his needs, the risk he is willing to take, and the type of
return the wants.
7) Scope for good return:

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Mutual fund invest in various industries and sectors, therefore


the portfolio gets diversified, resulting in mutual funds generating
equitable return.

8) Enables investing in high value stocks:-

the individual investors have less money to invest and cannot


invest in high value stocks such as Infosys. With Rs 12000 an
investors can purchase only 2 shares of infosis, which is like putting
all his eggs in one basket. Mutual funds have huge amount of funds
and can invest in these high value stocks. The benefits from this high
value stock can pass on to all the investors.

9) Easy liquidity:

Mutual fund provides easy liquidity. In the case of open-ended


scheme units can be purchased/sold at NAV from/to the mutual fund
on any day. In the case of closed-ended funds units are traded on the
stock exchange at the market prices, or the investors can repurchase
the units from the mutual fund at the prevailing NAV related prices.

10) Tax benefits:-

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There are certain schemes that offer tax benefits o the


customers. So the investor also tax benefits from mutual fund.

11) Provides transparency:

Mutual funds keep the customers informed about the


competition of all the investments in various asset classes from time
to time. During the launch of the mutual fund the offer document
provides information on the objective of the funds, cost to be incurred,
entry/exist load to be charged to the investor, risk associated with the
funds, & detail about the fund mariners, sponsors, members of trust
etc.

12) Regulated by SEBI:-

Just like equities, mutual funds are also regulated by the SEBI.
This is to safeguard the interests of investor.

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Portfolio manager

Portfolio managers are defined as persons who, in pursuance of a


contract with client, advise/ direct undertake on their behalf the
management/ administration of portfolio of securities/ funds of clients. The
term portfolio means the total holding of securities belonging to any person.
The portfolio management can be…

• Discretionary: the first type of portfolio management permits the


exercise of discretion in regard to investment/ management of the
portfolio of the securities /funds.
• Non-discretionary: the non-discretionary portfolio manager should
manage the funds in accordance with the direction of client.

In order to carry on portfolio management services, a certificate of


registration from SEBI is mandatory. But for category 1 and 2 merchant
banker a separate registration is not required to act as a portfolio manager.
They have, however, to carry on the portfolio management activity within
the framework of SEBI regulations applicable to portfolio managers. The
SEBI regulation applicable to portfolio manager. The SEBI is authorized to
grant and renew certificate of registration as a prior permission to portfolio
managers on the payment of the requisite registration/renewal fee. A
certificate/ renewal of registration is valid for three years. An application for
renewal must be made three months before the expiry of the validity of the
certificate. The annual registration fee payable to SEBI was Rs 2.5 lakh for

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the first two year and Rs. 1 lakh for the third year. The renewal fee was Rs
75,000 per annum. After November 1999, the registration fee and renewal
fee after every three years in Rs. 5 lakh respectively. The portfolio manager
is also to give an undertaking to take adequate steps for the redresses of
grievance of clients within one month of the receipt of complaint, keep SEBI
informed about the number, nature, and other particular of complaints and
abide by its rules and regulations.

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Procedure for Registration

While considering the application for registration made in the


prescribed form, the SEBI takes into accounts all matters relevant to the
activities relating to portfolio manager and in particular.

a) Necessary infrastructure like adequate office staff, equipment and


manpower to discharge his activities.

b) Has in employment a minimum of two persons with experience to


conduct portfolio management business.

c) A person directly/ indirectly connected with the applicant, that is,

associated/subsidiary/inter-connected pr Group Company has not been


granted registration;

d) Capital adequacy of not less than net worth of Rs. 50 lakh in term of
capital plus free reserves.

e) The applicant/ partner/ director/principal officer has not been convicted


for nay offence involving moral turpitude/ guilty of any economic offence;

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f) The applicant/partner/director/partner/ principal officer is not involved in


any litigation connected with the securities market;

g) The applicant has professional qualification in


finance/law/accounting/business management; and

h) Grant of certificate is in the interest of the investors.

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General Obligations and Responsibilities

 Code of Conduct:-

A portfolio manager has to, in the conduct of business; observe high


standards of integrity and fairness in all his dealing with his clients and
other portfolio managers. The money received by him from a client for an
investment purpose should be deployed as soon as possible and money
due and payable to a client should be paid forthwith.

A portfolio manager has to render at all times high standards of


services, exercise due diligence, ensure proper-care and exercise
independent professional judgment. He should either avoid any conflict of
interest in his investment or disinvestment decision, or where any conflict of
interest arises; ensure fair treatment of all his customers. He must disclose
to the client, possible sources of conflict of duties and interest, while
providing unbiased services. A portfolio manger should not place his
interest above those of his clients.

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He should not make any statement or become privy to any act, practice or
unfair competition, which i! Likely to be harmful to the interest of other
portfolio managers or is likely to place them in a advantageous position in
relation to the portfolio manager himself, while competing for or executing
any assignment.

Any exaggerated statement, whether oral or written, should not be


made ‘by him to client other about the qualification or the capability to-
render certain services or his achievements in regards to services n
rendered to the other clients.

At the time of entering into contract, he should been in writing from


the clients his interest in various corporate bodies which enable him to
obtain unpublished price-sensitive information of the, body corporate.

A portfolio manger should not disclose to any clients or press any


confidential information about his clients, which has come in his knowledge.

Where necessary and in the interest of the clients, he should take


adequate’ steps for the registration of the transfer of the clients’ securities
and for claiming and receiving dividends, interest payment and other right
accruing to the client. He must also make necessary action for the
conversion of securities and subscription/ renunciation of/or rights in
accordance with the clients’ instruction.

• A portfolio manager has to endeavor to:-

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a) Ensure that the investors are provided with true and adequate
information without making any misguiding or exaggerated claims and
are made aware of attendant risks before any investment decision is
taken by them;

b) Render the best possible advice to the client having regards to the
client’s needs and the environment and his own professional skills;

c) Ensure that all professional dealing are affected in prompt, efficient


and cost effective manager.

• A portfolio manger should not be party to:-

a) Creation of false market in securities;

b) Price rigging or manipulation of securities;

c) Passing of price sensitive information to brokers, members of the


stock COI exchanges and any other intermediaries in the capital
market or take any other action which in prejudicial to the interest of
the investors. No portfolio manager or any of its directors, partners or
managers should either on their respective accounts or through their
associates or family members, relatives enter into any transaction in
securities of the companies on the basis of published price sensitive

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information obtained by them during the course of any professional


assignment.

• Contract with Clients:-

Every portfolio manager is required, before taking up an assignment


of management of portfolio on behalf of a client, is enter into an agreement
with such client clearly defining the inter se relationship, and setting out
their mutual rights, liabilities and obligation relating to the management of
the portfolio of the client. The contract should, inter alias, contain.

i. The investment objectives and the services to be provided

ii. Areas of investment and restrictions, if any, imposed by the client with
regards to investment in a particular company or industry;

iii. Attendant risks involved in the management of the portfolio;

iv. Period of the contract and provision of early termination, if any;

v. Amount to be invested;

vi. Procedure of setting the client’s accounts including the form of


repayment on maturity or early termination of contract;

vii. Fee payable to the portfolio manager;

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viii. Custody of securities.

The funds of all clients must be placed by the portfolio manager in a


separates accounts to be maintained by him in a scheduled commercial
bank. He can charges an agreed fee from the client for rendering
portfolio management services without guaranteeing or assuring, either
directly or indirectly, any return and such fee should be independent of
the returns to the clients and should not be on return sharing basis.

 General Responsibilities;-

The discretionary portfolio manager should individually and


independently manage the funds of each client in accordance with the
need of the client in a manner, which does not partake the character of a
mutual fund, whereas the non-discretionary portfolio manager should
manage the funds in accordance with the direction of client. He should
act in a fiduciary capacity with regard to the client funds and transact in
securities in within the limitation placed by the client himself with regard
to dealing to securities under the provisions of the reserve bank of India
act, 1934. He should not derive any direct or indirect benefit out of the
client funds or securities. he cannot pledge or give on loan securities
held on behalf of client to a third person, without obtaining a written
permission from his client. He should ensure proper timely handling of
complaints from his client and take appropriate action immediately.

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 Investment of clients money:-

The portfolio manager should not accept money of securities from


his client from his client for a period of less than one year. Any renewal
of portfolio funds the maturity of the indicial period is deemed as a fresh
placement for a minimum period of one year. The portfolio funds can be
withdrawn or taken back by the portfolio client at his risk before the
maturity date of the contract under the following circumstances..

• Voluntary or compulsory termination of portfolio management


service by the portfolio manager.
• Suspension or termination of registration of portfolio manager by
the SEBI.
• Bankruptcy or liquidation in case the portfolio manager is a body
corporate.
• Permanent disability, lunacy or insolvency in case the portfolio
manager is an individual.

The portfolio manager can invest funds of his clients in money


market instrument or as specified in the contract, but not in bill
discounting, bedlam financing or for the purpose of lending or placement
with corporate or non-corporate bodies.

While dealing with clients funds, he should not indulge in


speculative transaction, that is, not enter into any transaction for the

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purchase or sale of any securities in which transaction is periodically or


ultimately settled otherwise than by actual delivery or transfer of security.
He may enter into transaction on behalf of the client for the specific
purpose of meeting margin requirements only if the contract so provides
and the client is made aware of, the attendant risk of such transaction.

He should ordinarily purchase all sell securities separately for each


client. However, in the event of aggregation of purchase or sales for
economy of scale, inter se allocation should be done on a pro rata basis
and at weighted average price of the days transaction. The portfolio
manager should not keep any position open in respect of allocation of
sales or purchase affected in a day.

Any transaction of purchase or sale including that between the


portfolio managers own account and client accounts or between two
clients account should at the prevailing market price. He should
segregate each clients fund and portfolio securities and keep them
separately from his own funds and securities and be responsible for the
safekeeping of clients fund and securities. He may hold the belonging to
the portfolio account in his own name on behalf of his client’s only if, the
contract so provides and in such an event his record and reports to the
client should clearly indicate that the securities are held by him on behalf
of the portfolio account.

 Maintenance of book of accounts / records:

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Every portfolio manager must keep am maintain the following book of


accounts, records and documents.
• A copy of balance sheet at the end of each accounting period.
• A copy of the profit and loss account for each accounting period.
• A copy of the auditor report on the account for each accounting
period.
• A statement of financial position and
• Record in support of every investment transaction or
recommendation which indicate the data, fact and opinion leading
to that investment decision.
After the end of each accounting period, copies of the balance sheet,
profit and loss account and such other documents for any other
preceding five accounting year when required must be submitted to the
SEBI. Half yearly unedited financial result, when required with a view to
monitor the capital adequacy have to be submitted to the SEBI the
books of account and other record and document must be preserved for
a minimum period off five years.

 Disclosure to SEBI :

A portfolio manager must disclose to SEBI a and when required the


following information.
• Particulars regarding the management of a portfolio.

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• Any information or particulars previously furnished, which have a


bearing on the certificate granted to him.
• The name of the clients whose portfolio he has managed and
• Particulars relating to the capital adequacy requirement

Underwriters

Another important intermediary in the new issue/primary market is the


underwriters to the issues of capital who agree to take u securities which
are not fully, subscribed. They make a commitment to get the issue
subscribed either by other or by them. Through underwriting is not
mandatory after April 1995, its organization is an important element of the
primary market, are appointed by the issuing companies in consultation
with the lead manager/ merchant banker to the issues. A statement to the
effect that in the opinion of the lead manager, the underwriters asset are
adequate to meet their obligation should be incorporated in the prospectus
certificate.

 Registration

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To act as underwriter, a certificate of registration must be obtained


from the SEBI in granting the registration, the SEBI considers all matters
relevant relating to the underwriting and in particular,

a. The necessary infrastructural like adequate office space, equipment and


manpower to effectively discharged the activity:
b. Past experience in underwriting/ employment of at least two persons
with experience in underwriting:
c. Any person directly/ indirectly connect with the applicant is not registered
with the SEBI as underwriter or previous application of any such person
has been rejected or any disciplinary action has been taken against such
person under the SEBI act/rules/regulation.
d. Capital adequacy requirement of not less than the net worth ( CAPITAL
+ free reserve) of Rs. 20 lakh: and
e. The applicant/ director/ principle officer/ partner has been convicted of

offence involving moral turpitude or found guilty of any economic


offence. Fee underwriters, had to, for grant or renewal of registration,
pay a fee to the SEBI from the date of initial grant of certificate, Rs 2
lakh for the first and second year and Rs 1 lakh for the third year. A fee
of Rs 20,000 was payable every year to keep the certificate in force or
for its renewal. Since 1999 the registration fee has been raised to Rs 5
lakh. To keep the registration in force, renewal fee of Rs 1 lakh. Every
three years from the fourth year the date of initial registration is payable.
Failure to pay the fee would result in the suspension of the certificate of
registration.

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General obligations and responsibilities:

1) Code of conduct :

Every underwriter has at all time to abide by a code of conduct; he


has to maintain high standard of integrity, dignity and fairness in all his
dealings with his clients and, other underwriters in the conduct of his
business. He has to ensure that he and his personal act in an ethical
manner in all dealing with the issuers of capital. An underwriter has to
rendered high standard of service exercise due diligence, ensure proper
care and exercise independent professional judgment. He must disclose to
the issuer his possible source/ potential areas of conflict of duties and
interest of other underwriters to place them in a disadvantageous position

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in relation to him while competing for/carrying out any assignment. He must


not make any written or oral statement to misrepresent…

• The service that he to be capable of performing for the issuer/


or has rendered to other issuer or
• He underwriting commitment

He should not divulge to other issuer/ any party any confidence


information about his issuer, which forms the come to his knowledge and
deal in securities of any issuer without disclosing to the SEBI or to the
board of director of the issuer. An underwriter should not willfully make
untrue statement/suppress material fact in any document, reports, papers
or information furnished to the SEBI.

a) Agreement with clients:

Every underwriter has to enter into an agreement with the issuing


company. The agreement, among others, provides for the period during
which the agreement is in for amount of underwriting obligations, the period
within which the underwriter has to subscribe to the after being intimated
by/on behalf of the issue, the amount of commission/ brokerage, and detail
of arrangement, If any , made by the underwriter for fulfilling the
underwriting obligations.

b) General responsibilities :

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An underwriter cannot derive any direct or indirect benefit from


underwriting the issue other than by the underwriting commission. The
maximum obligation under all writing agreements of an underwriter cannot
exceed 20 times his net worth, underwriters have to subscribe for securities
under the agreement within 45 days of the receipt of intimation from he
issuer.

c) Inspection and disciplinary proceedings:

The framework of the SEBI right to undertake the inspection of the


book of account, other record documents of the underwriters, the procedure
for inspection and obligation of the underwriters is on the same pattern as
applicable to the lead manager

d) Action in case of default :

The liability for action in case of default arising out of


• Non-compliance with any conditions subject to which
registration was granted,
• Contravention of any provision of the SEBI act/rules/ regulation
underwriter involves the suspension/cancellation of registration: the
effect of suspension/ cancellation on the lines followed by the SEBI in
case of lead manager.

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MERGERS /AMALGAMATION:

The terms merger and amalgamation are used interchangeably as a


form of business organization to seek external growth of business. A
merger is a combination of two or more firms in which only one firm would
survive and the other would cease to exist, its asset/ liabilities being taken
over by surviving firm. And amalgamation is an arrangement in which the
asset/liability of two or more firm to form a new entity or absorption of
one/more firm with another. The outcome of this arrangement is that the
amalgamating firm is dissolved/wound-up and losses it identity and its
shareholders become shareholders of the amalgamated firm. Although the
merger/amalgamation of firm in India is governed by the provision of the

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companies act, 1956, it does not defined this term. The income tax act ,
1961, stipulates to pre-requisite for amalgamation through which the
amalgamated company seeks to avail the benefit of set of / carry forward
of losses and unabsorbed depreciation of the amalgamating company
against its future profits u/s 72A ,namely,

1. All the property and liabilities of the amalgamated company / companies

immediately before amalgamation should vest with/ become the liabilities


of the amalgamated company and
2. The shareholders other than amalgamated company/its subsidiary holding

at list 90% value of shares/ voting power in the amalgamating company


should become shareholders of the amalgamated company by virtue of
amalgamation. The scheme of merger, income tax implications of
amalgamation and financial evaluation are discussed in the section.
Following the economic reforms in India in the post-1991 period,
there is a discernible trend among promoters and established corporate
group towards consolidation of market share and diversification into new
areas through acquisition/takeover of companies but in a more pronounced
manner through mergers/amalgamation. Although the economic
consideration in terms of motive and effect of these are similar, the legal
procedure involved is difficult. The merger and amalgamation of corporate
constitute a subject matter of the companies act, the courts and law and
there are well-laid down procedure for valuation of share and right of
investor. The acquisition/takeover bids fall under the purview of SEBI. The
terms merger and amalgamation on the one hand and acquisition and
takeover on the other are treated here synonymously. Section one of the

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chapter covers the framework of merger/amalgamation including financial


evaluation. The regulatory framework governing acquisition/takeover is
described in section two.

Scheme of merger/amalgamation:

Whenever two or more companies agree to merge with each other,


they have to prepare a scheme of amalgamation. The acquiring company
should prepare the scheme in consultation with its merchant banker/
financial consultant. The main contents of a model scheme, are listed
below

• Description of the transfer and the transfer company and the business
of transferor.
• Their authorized, issue and subscribed/ paid-up capital

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• Basis of scheme; the main terms, of the scheme in self’-contained


paragraph on the recommendation of valuation report, covering
transfer of asset/liabilities, transfer date, reduction or consolidation of
capital, application to financial institution as lead institution for
permission and so on.
• Change of name, object clause and accounting year .
• Protection of employment
• Dividend position and prospectus
• Management: board of director banking their number and
participation and transfer company’s director on the board
• Application under section 391and 394 of the companies act, 1956, to
obtain high course approval
• Expenses of amalgamation
• Condition of the scheme to become effective and operative, effective
date of amalgamation
The basis of merger/ amalgamation in the scheme should be the
report of the value’s of asset of both the merger partner companies. The
scheme should be prepared on the basis of the values report; reports of the
charter accountant engaged for financial analysis and fixation of exchange
ratio, report of auditors and audited account of both the companies
prepared up to the appointed date. It should be ensured that the scheme is
just and equitable to the shareholders, employees of each of the
amalgamating company and to the public.

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Qualities of a Good Merchant Banker

Merchant Bankers are individual’s experts who organize and


manage the merchant banks. The operation of a merchant bank is
influenced by the personality, traits of its merchant bankers. Their qualities
are:

1) Leadership:-

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In order to interact with their clients and communicate effectively


merchant bankers should possess all relevant skills and update
knowledge.

2) Aggressive action:-

Merchant bankers always looking for new business


opportunities. On locating a business opportunity and after obtaining
the assignment from the clients, a merchant banker has to be prompt
in grasping the client’s problems and to provide a better choice
amongst alternative solutions. A good merchant banker is one who
does not allow his clients to think anything outside except what has
been advised and thus holding the clients interest for the present as
well as for the future.

3) Co-operation and Friendliness:-

Co-operation and friendliness coupled with persuasiveness


must flow as natural traits in the merchant banker in order to win over
the trust of their clients just like a doctor or a lawyer who retains their
clients permanently. A good merchant banker has to share the
thoughts of his clients with sympathetic gestures and offer
suggestions without any greed or favors.

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4) Contacts:-

A merchant banking business mainly depends upon the


sociable nature and wider contacts. The scope of contact of a
merchant banker covers:
(a) His own organization
(b) Central and State Government Offices (c) Banks,
(c) Financial Institutions,
(d) Promoters/Directors/Owners/Chief Executives of the public and
private enterprises,
(e) Printers,
(f) Advertising Agencies,
(g) Brokers and Stock Exchange Dealers,
(h) Advocates and Solicitors
(i) Members of the press, etc.

Merchant bankers have to widen the contacts and continue to


maintain them by meeting people in personal, in special gatherings
and through writing to them.

5) Attitude towards problem solving:-

A good quality of a merchant banker is to be skilled in human


relations particularly in the inter-personal behavior. A merchant
banker should have a positive approach to understand the difficulties,

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adverse circumstances and the viewpoints of others. Effective


communication and proper feedback are the pre-requisites for
creating a positive attitude towards problem solving which could be
gained partly through the learning process and partly as an inborn
personality trait.

6) Inquisitiveness for acquiring new skills, information and


knowledge:-

Merchant bankers survive by providing the information required


by their needy clients. Therefore they must keep themselves updated
with the latest information in the area of the service product which
they market.

Development stages of Merchant Banking firms

In the merchant banking organization in the following chart,


the firm of merchant banker and individual stock broker have been included
as they have been contributing jointly to the growth of the profession of
merchant banking. But most of these firms are not well developed to show
stage of maturity. Most of them are still in the start-up and early growth

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stages. This is easily dissemble from the following projection of the


development stages

Stages in Principal financing


Organizational
Unit development of source
setup
merchant banking
1 Start-up Very loose Own investment
organization,
founders and

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associates involved
in the management
Emerging formal
organization,
founders, or
2 Early growth Individual investment
professional
manager in
management
Formal organization Firms investment
3 Accelerating growth with professional, with banks backing in
manager or founder terms of loan
Complex
Corporate finance
organization with
4 Sustaining growth from bank plus equity
professional
funds from public
manager
Multilayer complex Matching finance
5 maturity management available from all
organization possible sources

Market potential of merchant banking services

Merchant banking in the country has come to be primarily


associated with the capital markets. With deregulation of Indian markets
there are several new sectors open to private investment which have
consequently created an opportunity for private financing. The need for this
banking is not currently met, by their commercial banks or the financial

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institutions and hence there is a huge gap which needs to be filled. This
gap can be met through capital markets or a range of finance products and
hence a good scope exists for the various services offered by a merchant
banker. The establishment of SEBI and the abolition of the office of
Controller of Capital Issues (CCI) in 1992 heralded in area of free market
pricing of equity shares. Merchant bankers in particular have been
assigned a greater responsibility in the fixation of issue price & premium, if
any. In the CCI regime merchant bankers had restricted role to play in that
regard. The role was confined mainly to getting clearance from the CCI & to
ensuring the success of capital issue through marketing efforts. There were
also no disclosure norms. Merchant bankers were seldom held accountable
for the correctness of the information disclosed in the prospectus & letter of
offer but with issuance of comprehensive guidelines for free market pricing,
code of conduct for merchant bankers, etc. by SEBI role of merchant
bankers has considerably increased.

An outstanding development in history of Indian capital market was


opening up in 1992 by allowing financial institutions to invest in the primary
& secondary markets & also permitting Indian companies to directly tape
foreign capital markets through Euro Issues. The result was so encouraging
that within less than 2 years to march 1994 the total inflow of foreign capital
through these routes reached to about $5 billion. It was estimated that this
figure may go up to $35-$40 billion by the turn of the century. Though, at
the initial stage the Indian merchant banker have played supportive role
has almost all of the euro issue have been laid managed by foreign
merchant banker, but in future they may play major role by their increasing

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participation as managers/lead managers. Foreign direct investment (FDI)


has also investments by NRI have risen considerably due to number of
incentives offered to them. They need the service of merchant bankers to
advice them for their investments in India. Further increasing investments in
joint ventures abroad by Indian corporations also require expert service of
merchant banker. For the first time in India the concept of debt market has
set to work through NSE & OTCI. Experts feel that the estimated capital
issues of Rs.4000 crores in 1994-95, a good portion may be raised through
debt instruments. The development of debt market will offer tremendous
opportunity to, Merchant Bankers. Recently, Indian Capital Market has also
witnessed innovations in the financial instruments such as non-convertible
debentures with detachable warrants, cumulative convertible preference
shares, zero coupon bonds, and secured premium notes, suction rated
bonds, etc. This has further extended the role of Merchant bankers as
market makers for these instruments.

Level of Competition

The rapid growth in the primary capital market has led to an


even greater proliferation of Merchant Bankers. The number of Merchant
Bankers has increased from only 33 in the year 1989-90 to 405 in 1993-94.
Presently, the number of Merchant Bankers in different categories
registered with SEBI is 501 (August 1994). Considering a total number of

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public issues in the year 1994-95, a Merchant Banker on average vied or


3.5 issues. Therefore a tough competition exists in the line off issue
management. The high level of competition in Merchant Banking business
especially issue management is evident from the fact that out of 140
Category-I merchant Bankers in 1992-93 only 66 were able to manage an
issue.

Merchant Banking business is handled by a few established players


and for the others there is a heavy competition. Therefore, their survival
dependent on innovative capital issue structuring and other income
generating activities like leasing, high-purchase, investments and dealings
in secondary market operations.

As a result of liberalization and globalization, competition in


corporate sector is becoming intense. For their survival and growth,
companies are reviewing their strategies, structures and functioning. This
had led to corporate restructuring including mergers, acquisitions, splits,
divestments and financial restructuring. This area of corporate advisory
services which is largely in the hands of private consultancy firms, also
offers good opportunity to Merchant Bankers to extend the area of
operations.

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Environmental factors affecting merchant


banking services

Schematic view of environmental factors


Affecting Merchant Banking Services

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ENVIRONMENTAL FACTORS
-Open for change-
Merchant Banking Services

THE USERS OF SERVICES

General Technology Legal Aspect Demand


Economic Scientific Law & for
Conditions Innovations Regulations Services

THE MERCHANT BANKERS


-Open for entry-

The merchant bankers are a part of economics structure of the


nation and they function in an environment which is influenced inter alias by
the following important factors:
(1) The general economic condition, prevailing in the country
presenting an economics environment, affects the functioning of every
economic or social organization. These economic conditions assimilate the

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boom and prosperity, the depression and recessionary impacts on industry


trade and commerce.

(2) The technology and scientific innovations are responsible for


onward shifting of the entire developmental process to a state of higher
development. Besides, the technological development also helps the
system to use information processing and communication techniques to
overcome limitations or restrictions of time and space, and provide better
services.
(3) The ‘law and regulations’ affect the functioning and relationship
with users of the services of the organization. Besides complying to various
legal formalities the merchant bankers exist the legal framework. Both
creation of law and regulation of law is the network within which the
government and merchant bankers have to abide by the legal norms which
have the characteristics of change depending upon the moods of the public
system. (I.e. the government) and public interest.

(4) Demand for merchant banking services is one of the


environmental factors that affect the merchant banking functioning in two
respects viz. the competitive forces exist for merchant banking units and
there remains a demand for the quality service to be provided to the users.
Demand will change subject to changes in others environment
factors, particularly under the influence of technological development taking
place. The coverage of rural areas and small business is the present day
need of environmental through geared professionalism. The merchant
banking professionalism requires new response in education and training

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conforming to the dynamics of the change. Professional development


programs have got be reshaped to suggest merchant banks to render more
specialized services.

Conclusion

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The merchant banking business has increased over a short period


of time and with continued economic reforms. However, a stiff
competition exists in this line and survival will depend upon the financial
skills and spectrum of financial services and instruments offered by the
Merchant Banker. Hence, Merchant Banking Service is taking shape for
turbulent times.

Merchant banking is an activity initially undertaken by a few large


commercial banks in India, and it is now being adopted or undertaken by
a few large commercial banks in India, and it is now being adopted or
undertaken by practically every commercial bank through its Merchant
Banking Department. The range of activities covered under merchant
banking very wide indeed. The merchant banks offer a package of
financial services. Unlike in the past, their activities are now primarily
non-fund based. Therefore, they do not require much capital. One of the
basic requirements of merchant banking is a highly professional staff
and worldwide contacts. Merchant banking is usually international in
character.

- Mandar

REFERENCES:

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http://www.google.co.in/

http://moneycontrol.com

http://www.scribd.com

www.AllBusiness.com

http://www.reuters.com/finance/stocks/ratio

file://bankr/Finance%20and%20Investment%20Banking

F:\sbi bankr\ - Wikipedia, the free encyclopedia.mht

file:///F:/sbi%20bankr/CapitalMarket.com

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