MERCHANT BANKING

Merchant Banking is a business of issue

management either by making arrangements
regarding selling, buying or subscribing to
securities, or rendering corporate advisory
service in relation to such issue management.
Merchant Banking in India
 Merchant banking activity was formally initiated into the
Indian capital markets when Grind lays bank received the
license from RBI in 1967.

 Following Grind lays bank, CITI bank set up its Merchant

Banking division in 1970.

 State Bank of India started its MB division on 1972.

 Bank of India and Syndicate Bank in 1977.

 Bank of Baroda , Standard Chartered Bank and Mercantile
Bank in 1978.

 United Commercial Bank , Punjab national Bank, Canara

Bank and Indian Overseas

 Bank in late 70’s and early 80’s.

 ICICI started MB in 1973,

 IFCI in 1986, and

 IDBI in 1991.
Nature of Merchant Banking
Merchant Banking is a skilled-based activity and
involved servicing any financial need of the client. It
requires a focused skill base to provide for the
requirements of a client. SEBI has made the quality
of manpower as one of the criteria for renewal of
merchant banking registration.
Regulations of Merchant Banking

 Notifications of the Ministry of finance and

SEBI
 Rationale of notification.
 Objectives of the Merchant Bankers
Regulations
 CLASSIFICATION OF FINANCIAL MARKETS

FINANCIAL MARKETS

ORGANIZED UNORGANIZED

Capital Market Money Market

Industrial Govt. Long term Commercial Treasury Short term

Call money
Security Securities Loans Bill Bill Loan
mkt
mkt market market mkt mkt mkt

Mkt for Money lenders,

Primary Secondary Term Loan Mkt for
Financial Indigenous
mkt mkt mkt mortgages
guarantees Bankers.etc,.
UNORGANIZED MARKETS

In these markets there are a number of

moneylenders, indigenous bankers, and traders
etc who lend money to the public. Indigenous
bankers also collect deposits from the public.

Example: private finance companies, chit

funds, whose activities are not controlled by the
RBI.
ORGANIZED MARKETS
In the organized markets, there are standardized rules
and regulations governing their financial dealings.
There is also a high degree of institutionalization and
instrumentalization. These markets are subject to
strict supervision and controlled by RBI or other
regulatory bodies.

 Capital market
 Money market
CAPITAL MARKET
The term capital market refers to the institutional
arrangements for facilitating the borrowing and lending of
long-term funds.

The capital market is a market for financial assets, which have

a long or indefinite maturity. Generally it deals with long-term
securities, which have a maturity period of above one year.

Capital market may be further divided in to three namely,

 Industrial securities market.
 Government securities market and
 Long-term loans market.
Industrial securities market
As the very name implies, it is a market for
industrial securities namely:
Equity shares or Ordinary shares,
Preference shares and,
Debentures or Bonds.

It is market where industrial concerns raise their

capital or debt by issuing appropriate
instruments. It can be further divided into,
 Primary Market or New Issue Market.
 Secondary Market or Stock Exchange
Primary Market or New Issue Market

Primary Market is a market for new issues

or new financial claims. Hence it is also
called new issue market. The primary
market deals with those securities, which
are issued to the public for the first time.
In the primary market, borrowers
exchange new financial securities for long
tern funds. Thus, primary market facilitates
capital formation.
There are three ways by which the company may raise
capital in a primary market. They are,

Public Issue:
The most common method of raising capital by new
companies is through sale of securities to the public.
Rights Issue:
When an existing company wants to raise additional
capital, securities are first offered to the existing
shareholders on a pre-emptive basis.
Private Placement:
Is a way of selling securities privately to a small group of
investors.
Secondary Market or Stock Exchange

Secondary Market or Stock Exchange is a

market for secondary sale of securities. In other
words, securities that have already passed
through new issue market or traded in this
market. Generally, such securities are quoted in
the stock exchange and it provides a continuous
and regular market for buying and selling of
securities.
Government securities market
(Gilt edged securities market)

It is market where government securities are

traded. In India there are many types of
government securities- short term and
long term.
Long-term securities are traded in this
market while short-term securities are
traded in the money market.
 Securities issued by the central government, state
govt., semi govt. authorities like city corporations,
port trusts, improvement trusts, state electricity
boards, all India and state level financial institutions
and public sector enterprises are dealt in this
market.

The government securities are in many forms. These

are generally:
 Stock certificates
 Promissory notes
 Bearer bonds
Long-term loans market.
Development banks and commercial
banks play a significant role in this market
by supplying long term loans to corporate
customers. Long-term loans market may
further be classified into;
 Term loans market
 Mortgages market
 Financial guarantees market.
Term loans market

In India, many industrial financing have been

created by the govt. both at the national and
regional levels to supply long term and medium
term loans to corporate customers directly as
well as indirectly. These development banks
dominate the industrial finance in India.

Institutions like IDBI, IFCI, ICICI, and other state

financial corporations come under this category.
Mortgages market
Mortgages market refers to those centre, which
supply mortgage loan mainly to individual
customers. A mortgage loan is a loan against
the security of immovable property like real
estate. The transfer of interest in specific
immovable property to secure a loan is called a
mortgage. This mortgage may be

 Equitable mortgage or legal one.

 First charge or second charge.
 Primary market or secondary market.
Financial guarantees market.
A guarantee market is a centre where
finance is provided against the guarantee
of a reputed person in the financial circle.
Guarantee is a contract to discharge the
liability of a third party in case of his
default.
Though there are many types of
guarantees the common forms are :
 Performance guarantee, and
 Financial guarantee.
FUNCTIONS OF CAPITAL MARKET

Major functions performed by a capital market are,

 Mobilizing of financial resources on a nation
wide scale.
 Securing the foreign capital and know how to fill
up the deficit in the required resources for
economic growth at a faster rate.
 Effective allocation of the mobilized financial
resources by directing the same to projects
yielding highest yield or to the projects needed
to promote balanced economic development.
LINKAGE BETWEEN MARKETS
RELATIONSHIP BETWEEN EXCHANGE AND MONEY MARKETS

RELATIONSHIP BETWEEN NEW ISSUE MARKET AND STOCK

EXCHANGE

Differences
Types of securities dealt
Nature of financing
Organization

Similarities
New vs Old Securities
Control
Economic Interdependence