MERCHANT BANKING

Introduction
Merchant banking, although a non-banking financial activity, resembles banking function. The functions of merchant banking which originated, and grew in Europe, was enriched by American patronage, and these services are now being provided throughout the world by both

banking and non-banking institutions. The word Merchant Banking originated among the Dutch and the Scottish traders, and was later on developed and professionalized in Britain.

DEFINITION
According to Random House Dictionary, merchant bank is an organization that underwrites securities for corporations, advises such clients on mergers and is involved in the ownership of commercial ventures. 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.

According to the Securities and Exchange Board of India (Merchant Bankers) Rules, 1992, A merchant banker has been defined as any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or acting as manager, consultant, adviser or rendering corporate advisory services in relation to such issue management.

Merchant Bankers
A set of financial institutions that are engaged in

providing specialist services, which generally include the acceptance of bills of exchange, corporate finance, portfolio management and other banking services, are known as merchant bankers. It is not necessary for a merchant banker to carry out all the above-mentioned activities. A merchant banker may specialize in one activity, and take up other activities, which may be complementary or supportive to the specialized activity.

Roles & FUNCTIONS

Merchant banking, being a service-oriented

industry, renders the same services in India as merchant banks in UK and other European countries. In the U.S., investment bankers cater to the needs of business enterprises carrying out merchant banking functions. Merchant banks in India carry out the following functions and services:

I. Corporate Counseling 2. Project Counseling 3. Pre-investment Studies 4. Capital Restructuring 5. Credit Syndication and Project Finance 6. Issue Management and Underwriting 7. Portfolio Management 8. Working Capital Finance

9. Acceptance Credit and Bill Discounting 10. Mergers, Amalgamations and Takeovers 11. Venture Capital 12. Lease Financing 13. Foreign Currency Finance 14. Fixed Deposit Broking 15. Mutual Funds 16. Relief to Sick Industries 17. Project Appraisal

Corporate Counseling
Corporate counseling refers to a set of

activities that is undertaken to ensure efficient running of a corporate enterprise at its maximum potential through effective management of finance. A merchant banker, as a managerial economist, guides the client, on aspects of..

organizational goals, locational factors, organization size and operational scale, choice of product and market survey, forecasting for a product cost reduction and cost analysis, allocation of resources, investment decisions, capital management and expenditure control, pricing methods and marketing strategy, etc

Following are the activities which form part of corporate counseling:

Providing guidance in areas of diversification Undertaking appraisal of product lines, Rejuvenating old-line companies and ailing sick units by

appraising

their

technology

and

process,

Assessment of the revival prospects and planning for

rehabilitation through modernization and diversification

Arranging

for the approval of the financial institutions/banks for schemes of rehabilitation involving financial relief, etc Providing assistance in getting loans

Project Counseling
Project counseling is a part of corporate

counseling, and relates to project finance It broadly covers the study of the project, offering advisory assistance on the viability and procedural steps for its implementation.

Following are the activities forming part of the Project counseling:

Undertaking the general review of the project Providing advice on procedural aspects of

project implementation Conducting review of technical feasibility of the project on the basis of the report prepared by own experts or by outside consultants Assisting in the preparation of project report from a financial angle

Pre-investment Studies
Activities that are connected with making a

detailed feasibility exploration to evaluate alternative avenues of capital investment in terms of growth and profit prospects are called pre-investment studies. Some of these activities are as follows:

 Carrying out an in-depth investigation of

environment and regulatory factors, location of raw material supplies, demand projections and financial requirements Helping the client in identifying and shortlisting the projects Conducting such studies as may be required for foreign companies wishing to participate in joint ventures in India

Capital Restructuring Services

Following are the services covered Examining the capital structure of the client Preparing a comprehensive memorandum for

the Controller of Capital Issues Suggesting an alternative capital structure conforming to legal requirements

 Preparing a memorandum covering valuation

of shares and justifying the level of premium applied for Critically examining tax implications where the proposal involves offer for sale Suggesting the ideal capital restructuring for sick units and advising the client companies on the extent and means of bringing fresh capital into business

Credit Syndication
Activities connected with credit procurement and project financing, aimed at raising Indian and foreign currency loans from banks and financial institutions, are collectively known as credit syndication.

Activities covered under credit syndication are as follows:

Estimating the total cost of the project Drawing up a financing plan for the total project cost Preparing loan application for financial assistance Selecting institutions and banks for participation in financing Follow-up of term loan application with the financial institutions and banks Assisting in completion of formalities for drawing of term finance sanctioned by institutions

Issue Management and Underwriting

Preparation of an action plan Preparation of budget for the total expenses

for the issues Drafting of prospectus Selection of institutional and broker underwriters for syndicating/underwriting arrangements Selection of Issue Houses and advertising agencies for undertaking pre and post-issue publicity

Portfolio Management
Making decisions relating to the investment of the cash resources of a corporate enterprise in

marketable securities by deciding the quantum, timing and the type of security to be bought, is known as Portfolio Management. It involves making the right choice of investment, aimed at obtaining an optimum investment mix, taking into account factors such as the objectives of the investment, tax bracket of the investor, need for maximizing yield and capital appreciation, etc

Working Capital Finance

Assessment of working capital requirements Preparing the necessary application to negotiations

for the sanction of appropriate credit facilities Providing assistance in negotiations with all banks, and suggesting a sharing pattern of credit limits amongst participating banks, where more than one bank is involved Assisting, co-coordinating and expediting documentation and other formalities for disbursement Advising on the issue of debentures for augmenting long-term requirements of working capital

Acceptance Credit and Bill Discounting

Activities relating to the acceptance and the

discounting of bills of exchange, besides the advancement of loans to business concerns on the strength of such instruments, are collectively known as Acceptance Credit and Bill discounting

Merger and Acquisition

Undertaking management audits to identify areas of

corporate strength and weaknesses Conducting exploratory studies on a global basis to locate overseas markets, foreign collaborations and prospective joint venture associates Examining the pros and cons of proposals and formulating schemes for financial reconstruction, merger and acquisition Obtaining approvals from shareholders, depositors, creditors, government, and other authorities

 Monitoring the implementation of merger

and amalgamation schemes Identifying organizations with matching characteristics Assisting in the compliance of legal requirements, obtaining consent from various authorities, etc

Venture Financing
A specially designed capital, as a form of

equity financing for funding high-risk and high-reward projects, is known as Venture Capital A number of leading national development financial institutions such as IFCI, IDBI and ICICI are engaged in venture capital financing, and have developed a number of special schemes for this purpose

Lease Financing
A merchant banking activity whereby financial facilities are provided to companies that

undertake leasing, is known as Lease Financing. Providing advice on the viability of leasing as an alternative source for financing capital investment projects Providing advice on the choice of a favorable rental structure Providing assistance in establishing lines of lease for acquiring capital equipment, including preparation of proposals, documentations, etc.

Foreign Currency Financing

The finance provided to fund foreign trade

transactions is called Foreign Currency Finance. The provision of foreign currency finance takes the form of export-import trade finance, euro currency loans, Indian joint ventures abroad and foreign collaborations,

Brokering Fixed Deposits

Computation of the amount that could be raised by a company in the form of deposits from the

public and loans from shareholders Drafting of advertisement for inviting deposits Filing a copy of advertisement with the Registrar of Companies for registration Arranging for the issue of advertisement in newspapers, as required by the Companies Act Drafting and printing of application forms Making arrangements for the collection of deposits at the banks branches

Mutual Funds

Relief to Sick Industries

Rejuvenating old-lines and ailing units by appraising their technology and process,

assessing their requirements and restructuring their capital base Evolving rehabilitation packages which are acceptable to financial institutions and banks Exploring the possibilities of mergers/amalgamations, wherever called for Assisting in obtaining approvals from the Board for Industrial and Financial Reconstruction (BIFR) and other authorities under the Sick Industrial Companies (Special Provisions) Act, 1985

Project Appraisal
Financial appraisal Technical appraisal Economic appraisal

List of few Merchant Bankers

Avendus Capital Bajaj Capital Cholamandalam Investment & Finance Company ICICI Securities Ltd IDFC Kotak Mahindra Capital Company SBI Capital Markets Tata Investment Corporation Limited (TICL) Yes Bank UTI Securities Ltd