CRM Presentation topic:

MERCHANT BANKING
Presented by: Priyal Adhiya (01) Prerna Bhardwaj (03) Khushali Chheeda (05) Vivek Desai (07) Tanvi Gada (09) Aayushi Jain (13)

INDEX
1. 2. 3. 4. 5. 6. 7. 8. 9. INTRODUCTION TO MERCHANT BANKING MEANING, DEFINATION ORIGIN NEED AND IMPORTANCE MERCHANT BANKING FUNCTIONS MB vs. CB CATAGORIES OF MERCHANT BANKERS SERVICES OF MERCHANT BANKERS QUALITIES OF MERCHANT BANKLERS

10. PROBLEMS ASSOCIATED WITH MB 11. SEBI GUIDELINE &CODE OF CONDUCT 12. FUTURE PROSPECTS IN INDIA 13. REFRENCES

1. INTRODUCTION TO MERCHANT BANKING

The term Merchant Banking has its origin in the trading methods of countries in the late eighteenth and early nineteenth century when tradetaking place was financed by bill of exchange drawn by merchanting houses. At that time the merchants were merely financing their own activities. As international trade grew and other lesser-known names wanted to import goods from abroad, the established merchants lent3 Merchant Banking their names to the newcomers by agreeing to accept bills of exchange on their behalf. The acceptance houses would charge a commission for this service and thus there grew up the business of accepting bills of finance trade not merely of themselves, but of others. Acceptance business thus became and to a degree always has been hallmark of true Merchant Banks. The second historical of Merchant Banks was the raising of capital for foreign Government. In many cases, the Merchant Banks have been trading in the countries concerned and gained the confidence of Governments and other authorities in those countries. Thus the second principal ingredient of Merchant Banking became and still is raising of capital through the issue of stocks and bonds. Therefore, Merchant Banks can be accepting houses or issuing houses or both. Merchant Banking started in the beginning of 20 th century in UK and USA. More recently, the services offered by Merchant Banks have entered into the other areas of operations. Their role is wide ranging and they can now provide most of the financial services required by a company, touching almost all aspects of establishing and running of industrial unison sound financial footing. Dictionary meaning of merchant bank refers to an organization that underwrites corporate securities and advises such clients on issues like corporate mergers, etc. involved in the ownership of commercial ventures. This organization may be a bank, corporate body, firm or proprietary concern.

2. MEANING, DEFINATION
The first authoritative definition for the term Merchant Banker has been given in the Rule 2 (e) of SEBI (Merchant Bankers) Rules, 1922. Accordingly, A Merchant Banker means any person who is engaged in the business of Issue Management either by making arrangements regarding selling, buying or subscribing to Securities as Manager, Consultant, Adviser of rendering Corporate Advisory Service in relation to such Issue Management. Sec/5 (b) of the Banking Regulation Act, 1949 defines Banking as accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and with drawable by cheque, draft, order or otherwise. The Notification of the Ministry of Finance defines a merchant banker as, any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to the securities as manager, consult, adviser or rendering corporate advisory service in relation to such issue management.

3. ORIGIN
During the seventeenth and most of the eighteenth century international finance was centered on Amsterdam. Consequently Amsterdam merchants became the first masters of the various financial techniques and developments which, in the course of time, became identified with the emergent profession of Merchant Bankers. Commercial Banking and Investment Banking are often confused with Merchant Banking. In many ways, there may be similarities in their functions. However, in certain ways, Merchant Banking is distinctly different from commercial Banking and Investment Banking. The primary function of a commercial bank is to receive deposits from the public and lend the same to others. Commercial Banks can undertake some of the merchant banking activities like Issue Management whereas Merchant Banking Units can not undertake commercial banking activities. However, the functions of Merchant Banking may not widely vary from Investment Banking. The Merchant Banker mainly deals with Issue Management, post issue services, corporate adviser services etc. the Investment Banker undertaken trading in securities, Investment advises and Bought out deals which are not the main activities of Merchant Bankers. In todays Scenario the Merchant banker and management consultants undertake advisory services to the corporate sector. The Merchant Banker advices Corporation and firms relating to opening of issues, receiving loans etc. The management consultant have a wide area operations like production, Marketing, Personnel Relations, of finance etc. but they lack statutory recognition to undertake capital market related activities which has enabled the merchant banker to cater to the needs of the Corporate Sector.

A merchant bank may be considered as an institution which centers its operation on all or most of the following activities. (1) Corporate financial advice, on such diverse matters as new share and bond issues, capital reconstructions, mergers and acquisitions; (2) The taking of deposits and currency, money market operations including foreign exchange dealing; (3) Medium-term lending and syndication of loans; (4) Acceptance credits and all forms of export finance; (5) The holding and dealing in quoted and unquoted investment; and (6) Fund management on behalf of clients, most typically pension funds, unit trust, investment trusts and wealthy individuals

4. NEED AND IMPORTANCE

Important reason for the growth of merchant banking is due to exerting excess demand on the sources of funds forever expanding industry and trade. Corporate sector had the only alternative to avail of the capital market services for meeting their long-term financial requirements through capital issues of equity and debentures. With the growing demand for funds there was pressure on capital market that enthused the commercial banks, share brokers and financial consultancy firms to enter into the field of merchant banking and share the growing capital market. In India have opened their merchant banking windows and are competing in this field, and also doing advisory functions as merchant bankers as well as managing public issues in syndication with other merchant bankers. Merchant banks can play highly significant role in mobilizing funds of savers to investible channels assuring promising return on investments activity. With the growth of merchant banking profession corporate enterprises in both public and private, sectors would be able to meet the growing requirements for the funds for establishing new enterprises, undertaking expansion/modernization/diversification of the existing enterprises. Merchant banks have been procuring impressive support from capital market for the corporate sector for financing their projects. In view of multitude of enactments, rules and regulations, guidelines and off shoot press release instructions brought out by the Government from time to time imposing statutory obligations upon the corporate sector to comply with all those requirements prescribed therein, the need of skilled agency existed which could provide counseling. Merchant bankers advise the investors of the incentives available in the form of tax reliefs, other statutory relaxations, good return on investment and capital appreciation in such investment to motivate them to invest their savings in securities.
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5. MERCHANT BANKING FUNCTIONS

The role of merchant banker is dynamic in the wake of diverse nature of merchant banking services. Merchant bankers dynamism lies in promptly attending to the corporate problems and suggests ways and means to solve it. The nature of merchant banking services is development oriented and promotional to help the industry and trade to grow and survive. Merchant banker is, therefore, dedicated to achieve this objective through his dynamism. He is always awake to renew his skills, develop expertise in new areas so as to equip himself with the knowledge and techniques to deal with emerging new problems of corporate business world. He has to keep pace with the changing environment where Government rules, regulations and policies affecting business conditions frequently change; where science and technology create new innovations in production processes of industries envisaging immediate renovations, diversification, modernizations or replacements of existing plant and machinery or other equipments putting new demands for finances and necessitating overhauling of the capital structure of the firms. Merchant banker has to think and devise new instruments of financing industrial projects. He has to assume wider responsibilities of saving industrial units from going sick and guiding industries to be set up industrially backward areas to eliminate regional imbalances in industrial development of the country. He has to guide the wider section of the community possessing surplus money to invest in corporate securities and other productive investment channels. He has to help the industry in different forms to ensure that it runs risk free and devoid of uncertainty by assisting the has to watch the interest and win over the confidence of the Government, its agencies, along with the entrepreneurs, the investors and the whole community. He must bridge the communication gap between

different sections and resolve the problem being faced in different areas concerned with the business world. To discharge the above role, a merchant banker has t be dynamic. For this reason, a merchant banker is sometimes, called M.B i.e. Moving Bottom, i.e., one who never sits at one place, always moving- attending meetings and meeting clients and constituents, doing business and getting business by attending meetings and conferences, imparting knowledge to others and acquiring new knowledge to maintain his supremacy in possession of latest information. His role depicts a personality cult, which is unique and envious to be followed by others. In the days ahead, merchant bankers have very significant role to play tuning their activities to the requirements of the growth pattern of corporate sector, the industry and the economy as a whole, which is, in it, a challenging task and to meet these challenges merchant bankers will have to be more vigorous and strategic in playing their role. They will have also to adopt new ways and means in discharging their role.

6. MB vs. CB
There are differences in approach, attitude, and areas of operations between commercial banks and merchant banks. The differences between merchant banks and commercial banks are summarized below: Merchant bank Basically they deal with mainly funds raised through money market and capital market and the area of activity is equity and equity related finance Is management oriented. They generally are willing to accept risks of business. Commercial bank Basically deal in debt related finance and their activities are appropriately arrayed around credit proposals, credit appraisal and loan sanctions. Are asset oriented and their lending decisions are based on detailed credit analysis of loan proposals and the value of security offered against loans. They generally avoid risks. There activities They are merely include project counseling, corporate financiers. counseling in areas of capital restructuring, amalgamations, mergers, takeovers etc., discounting and rediscounting of short term paper in money markets, managing, underwriting and supporting public issues and new issue market and acting as brokers and advisers on portfolio management in stock exchange. This activities have impact on growth, stability and liquidity of money markets.

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7. CATAGORIES OF MERCHANT BANKERS

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

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

ISSUE MANAGEMENT: The public issue of securities is the core of merchant banking function. At one time it was constructed as the sole function. Merchant bankers were identified as issue houses. It was later perceived that they provide other financial services. When companies seek to raise resources for implementation of a new project or finance expansion or modernization or diversification of an existing unit or fund long term working capital requirement, they retain the services of a merchant banker. To a large extent the type of issue would vary with the purpose for which funds are raised. Merchant bankers when retained as managers to issue will have to assist the company in all the stages connected with public issue. CORPORATE ADVISORY SERVICES RELATING TO THE ISSUE In India, the pricing of issues is now freely decided by the company, with valuable inputs from the merchant bankers, who have to sell the issue at the decided price. The pricing of the issue especially in a public issue is very important. The pricing has to be such that the investors will be attracted to invest in the issue at that price, at the same time the company should get the premium that it is looking for. After all, the premium can play a very role in deciding the companys capital structure, as larger the premium lesser will be the requirement for borrowed funds. UNDERWRITING Underwriting is like insurance against the failure of an issue. It is a guarantee to the issuing the company, that the money that it requires for its project will definitely be raised. It means that even if the issue is not fully subscribed to by the public, the underwriters will make up the short fall. Underwriting involves the underwriter agreeing to subscribe directly, or to
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Procure subscription for the unsubscribe portion of the issue, which is not taken up. For the risk that the underwriter takes, he is paid commission. MERGERS AND ACQUISITIONS Mergers and acquisitions (M&A) and corporate restructuring are a big part of the corporate finance world. Every day, Wall Street investment bankers arrange M&A transactions, which bring separate companies together to form larger ones. When they're not creating big companies from smaller ones, corporate finance deals do the reverse and break up companies through spin-offs, carve-outs or tracking stocks. PROJECT COUNSELLING Project counseling is very important and lucrative merchant banking services which only very few merchant bankers having advantages of knowledge, skills and experience over others are able to render satisfactorily. The corporate seek advice in respect of identification of profitable investment opportunities in the related business areas (like forward/backward integration) or as part of diversification process. The merchant bankers carry out detailed studies on product demand patterns, cost structures, etc., to enable the corporate in preparation of feasibility study may involve arrangement of a foreign collaboration, advice on technical parameters and also legal issues. LOAN SYNDICATION It refers to assistance rendered by merchant banks to get mainly term loans for projects. Such loans may be obtained from a single development finance institution or a syndicate or consortium as in the case of large term loans. Merchant banks can also help corporate clients to raise syndicated loans from commercial banks.

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CORPORATE ADVISORY SERVICES Merchant bankers offer customized solutions to solve the financial problems of their clients. Advice is sought in areas of financial structuring (as shown in the Modern Manufacturing case above). Merchant bankers study the working capital practices that exist within the company and suggest alternative policies. They also advise the company on rehabilitation and turnaround strategies, which would help companies to recover from their current position. LEASE FINANCE COMPANIES Lease finance companies provide finance to acquire the use of assets for a stipulated period of time without owning them. The user of the asset is known as the lessee, and the owner of the asset is known as the lesser. Leasing is medium term arrangement for finance.

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9. QUALITIES OF MERCHANT BANKLERS

Merchant bankers are individual experts who organize and manage the merchant banks. The operations of merchant banks are, therefore, influenced by the personality trait of these individuals. For the success of merchant banks operations, the qualities which merchant bankers should have are discussed below:LEADERSHIP: merchant banker should possess all relevant skills, update knowledge to interact with the clients and effectively communicate. Leadership is synonymous with followers who follow the one who leads. AGGRESSIVE ACTION: aggressiveness is a personality trait of a good leader but in merchant banking it has a wider connotation. Aggressive merchant bankers are always looking for new business. Once a business opportunity has been located, the merchant banker has got to obtain the mandate for the merchant banking assignment from the clients at once which will depend upon his own communication skills, persuasiveness and the background of the organization to which he belongs. A good merchant banker is one who does not allow his client to think anything outside except what has been advised. COOPERATION AND FRIENDLINESS:- These two characteristics are the symbols of good leadership but it hardly needs to be stressed that cooperation and friendliness coupled with persuasiveness are the main instruments with which a merchant banker mixes with the people, gathers information, obtains business mandate and renders satisfactory services to the clients. Business of and honest business merchant banker spreads with geometrical propagation when he shares the thoughts of his clients with sympathetic gestures and offers pragmatic suggestions without greed or favors. Very often, rude, intemperate and indifferent disposition or blunt outburst withdrew fortunate business opportunities forever. Friendliness
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and cooperation must flow as natural traits in the merchant banker to win the trust of the clients. CONTACTS : success of merchant banker depends upon his sociable nature and the richness of wider contacts. A merchant banker is supposed to be acquainted deeply with all the constituents of merchant banking. The scope of contact encompasses intimate contiguity and acquaintances within his own organization, Central and State Government Offices where compliances under various relevant enactments are to be reported, Indian and foreign banks, financial institutions at Central and State levels, promoters/directors/owners and chief executives of the private and public enterprises which would be prospective beneficiaries of merchant banking services, printers, advertising agencies, brokers and stock exchange dealers, advocates and solicitors and members of the press whose services are availed of in executing merchant banking assignments. Merchant bankers should widen contacts and references and continue to maintain them with goodness, honor and humor by meeting people. ATTITUDE TOWARDS PROBLEM SOLVING: The most important personality trait of a merchant banker is his attitude towards problem solving. Even client coming to him has got to return fully satisfied having consulted a merchant banker. Positive approach to understand the view points of others, their difficulties and their adverse circumstances is possible only when a person is skilled in human relations particularly the inter-personal and intra-personal behavior. Effective communication and proper feedback are the pre-requisite for creating a positive attitude towards problem solving. Many persons are effective in this trait without any training for reasons of cultivating a habit from environment in which they have been brought up at home, in school, college and office. This is so important that it must be treated as a separate objective quality of a good merchant banker

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INQUISITINESS FOR ACQUIRING NEW SKILLS, INFORMATION AND KNOLEDGE: merchant bankers lice on their wits they earn by giving information to needy clients. Therefore, they should keep abreast with latest information in the area of the service product, they market. This is possible if merchant bankers possess the quality of inquisitiveness. The above qualities of a merchant banker are only illustrative. All good qualities in merchant bankers are difficult to be defined so elaborately. Nevertheless, merchant banker should possess super business acumen, managerial abilities, administrative capacities and salesmanship so as to understand the problems and sell the service product to the needy clients.

10. PROBLEMS ASSOCIATED WITH MB

1. SEBI guidelines have authorized merchant bankers to undertake issue Related activities only with an exception of portfolio management. These guidelines have made the merchant bankers either to restrict their activities or think of separating these activities from the present one and float new subsidiary and enlarge the scope of its activities. 2. SEBI guidelines stipulate a minimum net worth of Rs.1 crore for authorization of merchant bankers. Small but professional and specialized merchant bankers who do not have a net worth of Rs.1 crore may have to close down their business. The entry is denied to young, specialized professionals into merchant banking business. 3. Non co-operation of the issuing companies in timely allotment of securities and refund of application money is another problem of merchant bankers. The guidelines have put the responsibility on the merchant bankers. They have to seek the cooperation of the issuing company to shoulder the responsibility.
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11. SEBI GUIDELINE &CODE OF CONDUCT

SEBIguidelinesMerchant Bankers have been barred from undertaking activities other than related to the securities market. The SEBI (Merchant Bankers) Regulations, 1992 have been amended on December 19, 1997 to provide that: a. The applicant should be a fit and proper person; b. A merchant banker has to seek separate registration for its underwriting or portfolio management activities; c. The categorization of merchant bankers I, II, III and IV has been dispensed with; d .A merchant banker, other than a bank or a public financial institution, has been prohibited from carrying any activities not pertaining to the securities market; and e. The applicant should be a body corporate other than non-banking finance company. The Merchant Bankers Regulations were amended on January 21, 1998 to provide time up to June 30, 1998 to sever its activities or hive off its activities not pertaining to the securities market. The Reserve Bank of India has exempted merchant banking companies from the provisions of Reserve Bank of India Act, 1934 relating to compulsory registration (section 451A), maintenance of liquid assets (section 451B),creation of reserve fund (section 451C ) and all the provisions of the recent Directions relating to deposit acceptance and prudential norms. Merchant banking companies, to be eligible for the above exemption, are required to satisfy the following conditions: i. Such companies are registered with the SEBI under section 12 of the SEBI Act, 1992 and are carrying on the business of merchant banker in accordance with the Rules / Regulations framed by the SEBI; ii. They acquire securities only as part of their merchant banking business; iii. They do not carry on any other financial activities as mentioned in section 451 (c ) of the RBI Act,1934; iv. They do not accept / hold public deposits.
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Code of conduct: A merchant banker in the conduct of his business has to observe high standards of integrity and fairness in all his dealings with his clients and other merchant bankers. He ought to render at all times high standards of service, exercise due diligence, ensure proper care and exercise independent professional judgment. He has to, wherever necessary, disclose to the clients, possible sources of conflict of duties and interest, while providing services. He cannot make any statement or become privy to any act, practice unfair competition, which is likely to be harmful to the interest of other merchant bankers or is likely to place such other merchant bankers in a disadvantageous position in relation to him, while competing for or executing any assignments. He should not make any exaggerated statement, whether oral or written, to the client either about his qualification or his capability to render certain services or his achievements in regard to services rendered to other clients. A merchant banker has always to endeavor to (1) render the best possible advice to the clients having regard to the clients needs and the requirements and his own professional skill; and (2) ensure that all professional dealings are effected in a prompt, efficient and cost effective manner. He should not (1) divulge to other clients, press or any other party any confidential information about his client which has come to his knowledge; and (2) deal in securities of any client company without making disclosure to the SEBI as required under the regulations and also the board of directors of the client company. He should endeavor to ensure that (1) the investors are provided with true and adequate information without making any misguided or exaggerated claims and are made aware of attendant risks before any investment decision is taken by them: (2) copies of prospectus, memorandum and related literature are made available to the investors; (3) adequate steps are taken for the fair allotment of share application and transfers, listing of securities arrangement of underwriting/sub-underwriting, placing of issues, selection of brokers, bankers to the issue, publicity and advertising agents, printers, etc. In view of the overwhelming importance of merchant bankers in the process of capital issues, it is now mandatory that all public issues
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should be managed by merchant banker(s) functioning as the lead manager(s). In the case of right issues not exceeding Rs 50 lakh, such appointments may not be necessary. The salient features of the SEBI framework of their operations are summarized in this article. Registration: Compulsory Registration: Merchant bankers are compulsory registered with the SEBI to carry out their activities. They fall in four categories. Category I merchant bankers carry on any activity relating to issue management, i.e. preparation of prospectus and other information relating to the issue, determining financial structure, tie-up of financiers and final allotment of securities and refund of the subscription. They can also act as advisor, consultant, manager, underwriter or portfolio manager. Category II merchant bankers can act as advisor, consultant co-manager, underwriter, portfolio manager. Category III merchant bankers can act as an underwriter, advisor and consultant to an issue. Thus, only Category I merchant bankers can act as lead managers to an issue. Capital Adequacy Requirement: A merchant banker is granted recognition by the SEBI in different categories on the basis of capital adequacy norms in terms of its net worth comprising of paid-up capital and free reserves. The minimum net worth requirements for each category is: Rs 5 crore (Category I), Rs 0.5 crore (Category II), Rs 0.2 crore (Category III) and for Category IV nil. Apart from minimum capital requirement, the merchant bankers are expected to have the necessary infrastructure like adequate office space, equipment and manpower to effectively discharge their activities. They should employ at least two persons with experience to conduct merchant banking business; they should not be involved in any litigation connected with the securities market, have professional qualification in finance, law or business management and, finally their registration is in the interest of the investors.

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12. FUTURE PROSPECTS IN INDIA

In the present dynamic environment where public money is playing a vital role in financing a large number of projects, both in the public and private sectors, Merchant Banking has a significant role in managing the show and meeting the growing demands for funds by the corporate sector. Merchant Banking includes a whole gamut of activities which meet the needs of both corporate and individual investors and which range from identification, evaluation, promoting and financing of projects (both domestic and overseas) by raising resources in the equity and long-term loans, to organize and participate in international consortia, to raise foreign currency loans and to offer advisory services on various matters related to finance, investment, capital management, structure, mergers, amalgamation, takeovers and acquisitions. They also play a useful role in the portfolio management, money market operations, venture capital, leasing, etc. Merchant bankers act as a guide for the entrepreneurs who are unaware, or have little knowledge or experience, of the complexities involved in the above spheres. In addition to the above, the scope of Merchant Banking services has extended to providing advisory services to companies to increase or divest their stakes, public sector undertaking disinvestments, international issues, etc. With the OTCEI being operation now, Merchant Bankers will have a key role to play in terms of appraising the projects and offering two-way quotes for market making in case of entrepreneur going for listing in the above exchange. Merchant Bankers act as a critical link between the corporate who are intend to raise funds and the investors who are interested to invest in securities Industry. Besides issue management, the Merchant Bankers are also undertake the activities like underwriting connected with the public issue management business, Managing/advising on International offerings of Debt/Equity i.e., GDR, ADR, Bonds and other instruments, Private placement securities,
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Primary or Satellite dealership of government securities, Corporate Advisory services related to securities market (e.g., Takeovers, acquisitions, disengagement), Stock-Broking, Advisory Services for projects, Syndication of rupee term loans and International Financial Advisory Services.

13. REFRENCES
http://www.answers.com/topic/merchant-banking http://pnbindia.in/mbddetail.htm Financial Services : Nalini Prava Tripathy, Prentice-Hall of India Pvt ltd. Merchant Banking and Financial Services , Prof. Anil Agashe, Pune; Everest Publishing House.

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