MERCHANT BANKING

Dr. Divya
Asst. Professor
USMS, GGSIPU

Merchant Banking
 Merchant Banking

According to SEBI, “Merchant banker means a person who is

engaged in the business of issue management, either by
making arrangements regarding selling or by subscribing to
securities as managers, consultants, advisor or rendering
corporate advisory services in relation to issue management.”

Merchant Banking
 ORIGIN OF MERCHANT BANKING

 Merchant banking originated through entering of

London merchants in financing foreign trade through
acceptance of bills. Later these merchants assisted
govt. in raising long term funds through flotation of
bonds. Later on they extended their activities to
syndication of long term/short term finance,
underwriting, acting as registrars, debenture trustees,
portfolio managers, negotiating agents for mergers
and takeovers. Thus the institution of merchant
bankers came to stay.
Merchant Banking
 MERCHANT BANKING IN INDIA

 In India prior to enactment of Indian Companies Act 1956 managing

agency houses were issue houses for securities. Few share broking firms
also functioned as merchant bankers.
 The need for merchant bankers was felt when number of issues in primary
market were increasing. Merchant banking services were started by foreign
banks –National Grindlays and City bank in 1967, the banking commission
in its report 1972 recommended that commercial banks and financial
institutions should start their merchant banking wing. This marked
specialised merchant banking divisions.
 In 1972, SBI Merchant banking division started.
 SBI was the first and then ICICI, Bank of India, Bank of Baroda,Canara
bank, PNB, UCO bank followed. The merchant banking gained
prominence during 1983-84 due to new issues boom.

Merchant Banking
 Contd…
At present merchant banking services in our country are
Provided by:
 Commercial banks and their subsidiaries
 Foreign banks including National Grindlays banks, Citi bank,
Hongkong bank etc.
 All India Financial Institutions and Development bank such
as ICICI, IFCI, IDBI.
 State level Financial Institutions such as State Industrial
Development Corporations and State Financial Corporations.
 Private Financial Consultancy Firms and Brokers such as
J.M. Financial and Investment services Ltd., DSP Financial
consultants
 Technical consultancy organization.
Merchant Banking
 Factors Responsible for the Growth

 Globalization of Indian Economy

 Competition
 Changing Customer Demographics
 Technology Improvements
 Government Reforms
 Revolution in Banking Sector

Merchant Banking
 The Main Functions of a Merchant
Banker
 Corporate Advisory Services
 Project Counselling
 Capital Restructuring services
 Issue Management
 Portfolio Management
 Loan Syndication
 Underwriting
 Leasing Services
 Venture Capital Services
 Public Deposits
Merchant Banking
 Corporate Advisory Services

 Merchant bankers offer customized solutions to their clients

financial problems. The main areas in which their advice is
sought include Financial structuring, refinancing alternatives
of the client, rehabilitation and turnaround management.
 In case of sick units, merchant bankers may design a revival
package in coordination with banks and financial institutions.
 Risk management is another area where advice from a
merchant banker is sought. He advises the client on different
hedging strategies and suggests the appropriate strategy.

Merchant Banking
 Project Counselling

 Merchant bankers help their clients in various stages of

the project undertaken by the clients. They assist them in
Conceptualizing the project idea in the initial stage. Once
the idea is formed, they conduct feasibility studies to
examine the viability of the proposed project. They
alsoassist the client in preparing different documents like
the detailed project report.
 0.25% to 2% of the project cost is charged as fees.

Merchant Banking
 Corporate Restructuring
 Helps in mergers, takeover advice,
identifying areas of diversification,
redesigning capital structure.

Merchant Banking
 Issue Management
Under Issue management services provided include:
 Preparation of the application
 Preparation of a plan and budget to estimate total expenditure of the issue
 Preparation of Controller of Capital Issues application
 Appointment of Registrars, brokers and bankers to the issue
 Selection of issue house
 Compliance of listing requirements of stocks exchanges
 Merchant banker advises the client whether to go for a fresh issue or additional issue or
bonus issue or right issue of equity or preference or both.
 Drafting prospectus
 Filing of prospectus to registrar.
 Opening and closing subscription list
 Allotment and refund procedure
 Actual listing of securities
Fees- 0.5% of amount of public issue upto Rs. 25 crores.
0.2% of amount of public issue more than Rs 25 crores.

Merchant Banking
 Portfolio Management
Merchant banks advise their clients regarding investment
decisions as to the quantum of amount of security and the type
of security in which to invest.
Merchant banks provide portfolio management services in the
form of:
 The sale and purchase of securities
 Investing and purchase of securities
 Investing and managing fixed deposits
 Trust funds, pension funds and investments and their review
 Safe custody of securities in India and overseas
 Reinvesting the returns collected from investments in some
profitable avenues. Merchant Banking
 Loan Syndication
Merchant bankers arrange to tie up loans for their clients.
This takes place in a series of steps.
 Firstly they analyze the pattern of the client’s cash flows, based on
which the terms of borrowings can be defined.
 Preparing loan application
 Then the merchant banker prepares a detailed loan memorandum,
which is circulated to various banks and financial institutions and
they are invited to participate in the syndicate.
 The banks then negotiate the terms of lending on the basis of
 which the final allocation is done.
 Legal Documentation
 Fees – 1% of the loan amount

Merchant Banking
 Underwriting
 Except category IV merchant bankers
everyone can perform underwriting role.
 Fees – 2.5 % in case of equity shares
 1.5% in case of debentures

Merchant Banking
 Leasing Services

Merchant bankers also provide leasing and finance facilities to

their customers. Lease is a contract between the owner of the
asset (lessor) and user of the asset called the lessee, whereby the
lessor gives the right to use the asset to the lessee over an agreed
period of time for a consideration called the lease rental.
Merchant bankers assist their clients by providing finance for the
acquisition of asset taken on lease.

Merchant Banking
 Venture Capital Services

Many merchant bankers maintain venture capital funds to assist

the entrepreneurs who lack capital to be risked. Capital funds
may be provided for unproven ideas, products technology
oriented or start-up funds. It is a form of equity financing
especially designed for funding high risk and high reward
projects.

Merchant Banking
 Public Deposits

Merchant bankers also help companies in raising finance by way

of public deposits.

Merchant Banking
 Merchant Banking Regulation
 SEBI (Merchant Bankers) Regulation Act, 1992 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
securities or acting as manager, consultant, adviser or
rendering corporate advisory service in relation to such
issue management.
 No organization can act as a ‘merchant banker’ without
obtaining a certificate of registration from the SEBI.
 To obtain the certificate of registration, one had to apply in
the prescribed form and fulfill two sets of norms
(i) Operational capabilities and
(ii) Capital adequacy norms.
Merchant Banking
 Classification of Merchant Bankers
The SEBI has classified ‘merchant bankers’ under four
categories for the purpose of registration:
1. Category I Merchant Bankers:- can act as issue manager, which will,
inter alia, consist of preparation of prospectus and other information
relating to the issue, determining financial structure, tie up of
financiers and final allotment and refund of the subscriptions; and
advisor, consultant, underwriter and portfolio manager.
2. Category II Merchant Bankers:- can act as advisor, consultant,
underwriter and portfolio manager.
3. Category III Merchant Bankers:- can act as underwriter, advisor and
consultant only.
4. Category IV Merchant Bankers:- can merely act as consultant or
advisor to an issue of capital.

Merchant Banking
 Capital Adequacy Norms
The capital adequacy is expressed in terms of minimum net
worth, i.e., capital contributed to the business plus free reserves.

Capital Adequacy Norms

Category of Merchant Bankers Minimum Net Worth
Category I Rs.5 crores
Category II Rs.50 lakhs
Category III Rs.20 lakhs
Category IV Nil

Merchant Banking
 Initial Licence fees
 Category I- Rs. 2.5 lakhs for the Ist and
2nd yr and 1 lakh for the third yr.
 Category II- Rs. 1.5 lakh for the 1&2 nd yr
and Rs.50,000 for the 3rd yr.
 Category III- Rs. 1 lakh for the 1 & 2 nd yr.
and Rs.25,000 for the 3rd yr.
 Category IV- Rs. 5,000 for the 1 &2 nd yr
and Rs.1,000 for the 3rd yr.
Merchant Banking
 Registration of Merchant Bankers

Registration with SEBI is mandatory to carry out the business

Of merchant banking in India. An applicant should comply
with the following norms:
 The applicant should be a body corporate
 The applicant should not carry on any 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

Merchant Banking
 Contd…
 Any associate company, group company, subsidiary or interconnected company of the
applicant should not have been a registered merchant banker
 The applicant should not have been involved in any securities scam or proved guilt for
any offence
 The capital adequacy requirement referred to in clause (d) of regulation 6 shall be a
net worth of not less than five crore rupees.
 Explanation: For the purposes of this regulation, “net worth” means the sum of
paidup capital and free reserves of the applicant at the time of making application
under sub-regulation (1) of regulation 3.]
 The certificate of registration granted under regulation 8 and its renewal granted under
regulation 9, shall be valid for a period of three years from the date of its issueto the
applicant.]

Merchant Banking
 MERCHANT BANKERS AS LEAD MANAGERS

 As per SEBI guidelines it is mandatory that all public issues should be

managed by merchant bankers in the capacity of lead managers. Only in
case of rights issue not exceeding 50 lakhs such an obligation is not
necessary. The number of lead managers depends on size of the issue.
 Less than 50 crores—2,
 50 to 100 crores - 3,
 100 to 200 crores - 4,
 200 crores to 400 crores- 5,
 above 500 crores –5 or more as prescribed by the SEBI.
 Duties and responsibilities of lead managers –
 1) ageement with issuing company- which is to be submitted to SEBI
at least one month before the issue opens.
 2) every merchant banker must have registration of SEBI
 3) lead manager cannot undertake work if the company is its associate.

Merchant Banking
Duties and responsibilities of lead
managers
 4) if more than one lead managers then responsibilities of each must be
clearly defined in the agreement
 5) the lead manager is under obligation to accept minimum underwriting
obligation of 5 % of the issue or 25 lakhs whichever is less.
 6) lead manager has to give due diligence certificate that prospectus or letter
of offer is in conformity with documents relevant to issue, disclosures are
true,fair, adequate and all legal requirements all duly complied with..
 7) every lead manager has to submit all particulars of issue, prospectus to
the SEBI at least two weeks before the date of filing with the registrar of
companies or regional stock exchange or both
 8) any suggestions made by SEBI must be properly incorporated
 9) in case of development the lead manager has to ensure that underwriters
contribute the amount of their liability
 10) every lead manger is responsible for timely refund of any excess
application money
 11) it is his duty to mail; share/debenture certificate immediately on
allotment or inform it to the depository participant .

Merchant Banking
 CODE OF CONDUCT FOR
MERCHANT BANKERS

A merchant banker shall make all efforts to protect the interests of investors.
 A merchant banker shall maintain high standards of integrity, dignity and fairness in
the conduct of its business.
 A merchant banker shall fulfil its obligations in a prompt, ethical, and professional
manner.
 A merchant banker shall at all times exercise due diligence, ensure proper care and
exercise independent professional judgment.
 A merchant banker shall endeavour to ensure that—
(a) inquiries from investors are adequately dealt with;
(b) grievances of investors are redressed in a timely and appropriate manner;
(c) where a complaint is not remedied promptly, the investor is advised of any
further steps which may be available to the investor under the regulatory system.
 A merchant banker shall ensure that adequate disclosures are made to the investors
in a timely manner in accordance with the applicable regulations and guidelines so as
to enable them to make a balanced and informed decision.
 A merchant banker shall endeavour to ensure that the investors are provided with
true and adequate information without making any misleading or exaggerated claims
or any misrepresentation and are made aware of the attendant risks before taking any
investment decision. Merchant Banking
 CODE OF CONDUCT FOR
MERCHANT BANKERS
 A merchant banker shall endeavour to ensure that copies of the prospectus,
offer document, letter of offer or any other related literature is made
available to the investors at the time of issue or the offer.
 A merchant banker shall not discriminate amongst its clients.
 A merchant banker shall not make any statement, either oral or written,
which would misrepresent the services that the merchant banker is capable
of performing for any client or has rendered to any client.
 A merchant banker shall avoid conflict of interest and make adequate
disclosure of its interest.
 A merchant banker shall always endeavour to render the best possible
advice to the clients having regard to their needs.
 A merchant banker shall not indulge in any unfair competition, such as
weaning away the clients on assurance of higher premium or advantageous
offer price or which is likely to harm the interests of other merchant
bankers or investors or is likely to place such other merchant bankers in a
disadvantageous position while competing for or executing any
assignment.
Merchant Banking
 CODE OF CONDUCT FOR
MERCHANT BANKERS
 A merchant banker shall maintain arms length relationship between its merchant
banking activity and any other activity.
 A merchant banker shall have internal control procedures and financial and
operational capabilities which can be reasonably expected to protect its operations, its
clients, investors and other registered entities from financial loss arising from theft,
fraud, and other dishonest acts, professional misconduct or omissions.
 A merchant banker shall ensure that the Board is promptly informed about any
action, legal proceedings, etc., initiated against it in respect of material breach or non-
compliance by it, of any law, rules, regulations, directions of the Board or of any
other regulatory body.
 A merchant banker shall provide adequate freedom and powers to its compliance
officer for the effective discharge of the compliance officer’s duties.
 A merchant banker shall develop its own internal code of conduct for governing its
internal operations and laying down its standards of appropriate conduct for its
employees and officers in carrying out their duties. Such a code may extend to the
maintenance of professional excellence and standards, integrity, confidentiality,
objectivity, avoidance or resolution of conflict of interests, disclosure of
shareholdings and interests, etc.

Merchant Banking
Thank You

Merchant Banking