Merchant banking

Presented by:Mr. Aaditya s. n.

Mr. brijesh tiwari
Mr. Gudnidhi
patel
(xavier institute ,Xidas jabalpur)

01/20/15

XIDAS, Jabalpur

INTRODUCTION
Investment Banking is an American Synonym of
Merchant Banking;
Merchants used to attend to extending of loans
and arranging finance for trade purposes;
As the time passed the banking assumed more
importance and the merchants switched over to
banking activities, hence the term merchant
Banking took placed.

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Meaning

Merchant banking is a non-banking financial

activity similar to banking;
Merchant banking is a fee based business, where
the bank assumes market risk but no long-term
credit risk.
These are financial institutions providing
valuable solutions such as:Acceptance of bills of exchange;
Corporate finance;
Portfolio management;
Other non-banking services.

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definition
An organization that underwrites securities for corporations,

advices such clients on mergers, and is involved in the

ownership of commercial ventures.
According to Mr. Rosenburg

Any person who is engaged in the business of issue

management either by making arrangements regarding selling,
buying or subscribing to the securities as manager; consultant
adviser; or one rendering corporate advisory services in
relation to such activities in the management.
According to MOF, India

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Origin
In Britain started in the 13th century when a few private
firms engaged themselves in foreign trade and finance.
Based on the British model Dutch and Scottish traders
started merchant banking.
In USA merchant banking was developed by the
European bankers.
West Germany developed close link with the commercial
banks thus offering variety of services to customers.
In 1972 merchant banking practice was started in South
Africa
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Indian scenario
In 1857, the chartered mercantile bank of india started its
operations.
During the 19th century, the foreign bankers operated in
India through the popular agency house called East India
House.
National Grindlays Bank opened its branch in 1967.
SBI floated its merchant banking division in 1972.
Some of the banks which started Merchant banking are
Central bank of India, BOI, syndicate bank, BOB, Standard
chartered bank, ICICI, IFCI and IDBI etc.
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Functions

Issue Management Services to act as Book Running Lead

Manager/Lead Manager for the IPOs/FPOs/Right issues/Debt
issues
Project appraisal;
Corporate Advisory Services;
Underwriting of equity issues;
Banker to the Issue/Paying Banker;
Refund Banker;
Monitoring Agency;
Debenture Trustee;

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Categories
To act as a merchant banker, a person or firm should hold a
certificate granted by the regulator- the securities and
exchange board of India. SEBI regulations provide for 4
categories of Merchant Bankers;
Category I: It Will take up activities associated with
issue management.
Category II: Allowed to carry the roles of advisor, consultant,
co-manager, underwriter and portfolio manager;
Category III: Allowed to act as underwriter, advisor, and
consultant; and
Category IV: Only allowed to act as advisor or consultant.
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CAPITAL ADEQUACY NORMS :

Category I

: Rs. 5 crores

Category II

: Rs.50 lakhs

Category III : Rs.20 lakhs

Category IV : Nil

Services of Merchant Bankers

o
o
o
o
o
o
o
o
o
o

Corporate counseling;
Project Counseling;
Loan syndication;
Management of capital issues;
Advisory services to mergers and takeovers;
Consultancy to sick industrial units;
Corporate Advisory services;
Portfolio management;
Leasing; and
Issue Management.

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Principal steps in the issue of

Prospectus

Design and vetting of prospectus;

Nature of instrument;
Pricing of the issue;
Appointment of underwriters;
Appointment of bankers;
Appointment of registrars;
Appointment of brokers and principal brokers.

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Qualities of Merchant Banker

Should have knowledge and information about

the capital markets, trends in the stock
exchange, psychology of the investing public,
and technological and economical changes in
the country;

Ability to analyze and evaluate various technical,

financial, and economical aspects concerning the
formation of an industrial project;

Safeguard the interest of the investing public.

Integrity and maintenance of high professional
standards are necessary for the success;

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Conti
Should realize the changing environment of
capital market and keep cordial relationship with
the investors;
They should develop innovative capital market
instruments for satisfying the changing needs of
investors;
Must restrict, concentrate and develop their
strength to keep costs under control.

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Filing of the prospectus

Printing and dispatch of prospectus
application form;
Filing of initial listing application;
Promotion of the issue;
Statutory announcement;
Collection of applications;
Processing of applications;
Allotment of shares;
Listing of the issue;
Cost of public issue.

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Problems of Merchant Bankers

As per SEBI guidelines, Merchant Bankers are authorized to
undertake only issue related activities, which restrict their
scope of activities.
Issuing companies do not adhere to the schedule in allotment
and refund of application money thereby creating trouble for
the image of these bankers at the investors.
Yet merchant banking is vast but should develop adequate
expertise to provide a full range of merchant banking services

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SOME PROBLEMS OF MERCHANT BANKERS

SEBI stipulates high capital adequacy norms for authorisation

which prevents young,specialised professionals into merchant
banking business
Non co-operation of the issuing companies in timely allotment of
securities and refund of application of money etc.. is another
problem
Yet merchant banking is vast but should develop adequate
expertise to provide a full range of merchant banking services

Guidelines for the Merchant

Bankers
Should have qualification in finance, law or business
management;
Should have adequate office space, equipment and
manpower;
At least 2 merchant bank operations qualified persons
to be appointed;
Should be fair in all transactions;
SEBI will supervise the activities of merchant bankers.
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Continue
o SEBI has laid responsibility on merchant banks for the true
disclosures and factual statements made on the prospectus and
the authenticity of such statements;
o SEBI has the power to suspend or cancel the authorization of
merchant bankers in case of any violation of the guidelines;
o Merchant bankers should send quarterly reports on the public
issue and rights issue on hand, the names of the companies,
size of the issue, and other details;
o Should abide by the code of conduct prescribed by SEBI;
o For the issue over Rs. 100 crs, the number of BRLMs should
be 4 to 5;
o Merchant bankers should make an agreement with corporate
bodies about their mutual rights, liabilities and obligations etc.
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Future prospects in India

Growth of primary market;

Entry of foreign investors;

Changing policy of financial institutions;

Development of debt market;

Corporate restructuring.

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References
http://www.answers.com/topic/merchant-banking
http://pnbindia.in/mbddetail.htm
Financial Services : Nalini Prava Tripathy, PrenticeHall of India Pvt ltd.(Publisher)

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