Subject – FINANCIAL SERVICES

Class –B.B.A./M.B.A.
Topic – Merchant Banking

• Key-Words – issue management, credit syndication, working capital,

issue management
Dr. Dileep Kumar Singh
Institute of Management Studies
Faculty of Commerce and Management Studies
Mahatma Gandhi Kashi Vidyapith Varanasi – 221002
e-mail : singh96906238@gmail.com
Merchant Banking

Dr. Dileep Kumar Singh

Assistant Professor
Institute of Management Studies
Mahatma Gandhi Kashi Vidyapith
Varanasi

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 What Is Merchant Banking ?
• Merchant Banking may be defined as an
institution which covers a wide range of activities
such as underwriting of shares, portfolio
management, Project counseling, insurance etc.
They all render these service for a fee. Both
commercial and investment banks may engage in
merchant banking activities.
• The original purpose of merchant banks was to
facilitate and/or finance production and trade of
commodities and hence the name "merchant“.
 Who Is A MerchantBanker?
• A merchant banker is one who is a critical link
between a company raising fund and the
investors.
• Merchant banker is one who underwrites
corporate securities and advices on issues like
corporate mergers.
• The merchant banker may be in the form of a
bank, a company, firm or even a proprietary
concern.
• Merchant Banker understands the requirements of
the business concern and arranges finance with
the help of financial institutions, banks, stock
exchanges and money market
 Functions Of Merchant Banks
• Promotional Activities – Merchant Banks helps
the entrepreneur in conceiving an idea,
identification of projects, preparing feasibility
reports, obtaining Government approvals and
incentives etc.
• Issue Management - Management of issues
refers to effective marketing of corporate
securities viz., equity shares, preference shares
and debentures or bonds by offering them to
public. Merchant banks act as intermediary whose
main job is to transfer capital from those who own
it to those who need it .
 Functions Of Merchant Banks (cont)

• Credit Syndication - Credit Syndication refers to

obtaining of loans from single development
finance institution or a syndicate or consortium.
Merchant Banks help corporate clients to raise
syndicated loans from commercials bank.
• Project Counseling- It includes preparation
of projects reports, deciding upon the financing
pattern, appraising the project relating to its
technical, commercial and financial viability. It
includes filling up of application forms for
obtaining funds from financial institution.
 Functions Of Merchant Banks (cont)
• Portfolio Management - It refers to the effective
management of Securities i.e., the merchant banker helps
the investor in matters pertaining to investment decisions.
Taxation and inflation are taken into account while advising
on investment in different securities. The merchant banker
also undertakes the function of buying and selling of
securities on behalf of their client companies. Investments
are done in such a way that it ensures maximum returns and
minimum risk.
• Working capital Finance: Merchant bankers provide the
following services as a part of working capital finance
• Assessment of working capital requirement
• Preparing the application for the sanction of appropriate
credit facilities
• Providing assistance in negotiations with the banks.
• Advising on issue of debenture for augmenting long term
requirement of working capital.
 Functions Of Merchant Banks (cont)
• Acceptance credit and bill discounting: Activities relating to the
acceptance and discounting of bills of exchange, besides
advancement of loans to business concerns on strength of such
instruments. In order that the bill accepting and discounting takes
place it is imperative that the firms have a good reputation.
Collecting credit information and credit rating is part of this
function.
• Mergers and acquisitions: This is a specialized service provided by
merchant bankers who arrange for negotiating acquisitions and
mergers by offering expert valuation regarding the quantum and
nature of consideration. The activities involved include
• Undertaking management audits to identify the areas of strength and
weakness in order to help formulate guidelines for future growth.
• Conducting exploratory studies on a global basis to locate overseas
market, foreign collaborations, and JVs
• Obtaining approval from shareholders, depositors, creditors,
government and other authorities.
• Identifying organizations with matching characteristics.
• Assisting in capital restructuring.
• Assisting in legal complince.
 Functions Of Merchant Banks (cont)
• Leasing and Finance – Many merchant bankers
provide leasing and finance facilities. Some of them
even maintain venture capital funds to assist the
entrepreneurs. They also help companies in raising
finance by way of public deposits.
• Servicing Issues – Merchant Bankers helps in
servicing the shareholders and debenture holders in
distributing dividends, debenture interest.

• Other Specialized Services – Merchant Banks also

provide corporate advisory services on issues like
mergers and amalgamations, tax matters, recruitment of
executives and cost and management audit etc.
 Merchant Banking In India
• Need for merchant banking was felt with rapid growth in
number and size of issues made in primary issue.
• Merchant Banking services started by foreign banks,
namely National Grindlays in 1967 followed by Citi Bank
in 1970.
• Merchant Banking services was offered along with other
traditional banking services.
• SBI was first Indian bank to set up merchant banking
division in 1972.
• Later, the ICICI set up its merchant banking division in
1973.
• It was followed by other commercial banks like Canara
Bank, Bank of Baroda, Bank Of India, Syndicate Bank,
Central Bank Of India, PNB, UCO Bank etc.
 Merchant Banking Regulations
According to Securities and Exchange Board of India
(Merchant Bankers) Rules, 1992, it is mandatory for a
merchant banker to hold a certificate of registration
granted by the Securities and Exchange Board of India.
If a person/ organization wants to carry or undertake
any of the authorized activities, has to get registered
under the regulations. To obtain the certificate of
registration, one has to apply in the prescribed form
and fulfill two set of norms (a) operational capabilities
and (b)capital adequacy norms
 Classification Of Merchant Banker
• Category I – to carry on the activity of issue
management i.e., the preparation of prospectus,
determining the financial structure, tie-up of
financiers ,financial allotment of securities and so
on. To act as adviser, consultant, manager,
underwriter, portfolio manager.
• Category II - to act as adviser, consultant, co-
manager, underwriter, and portfolio manager.
• Category III - to act as underwriter, adviser and
consultant to an issue.
• Category IV – to act only as adviser or consultant
to an issue of capital
 Capital Adequacy Norms

• The minimum net worth requirement for acting

as merchant banker is given below:
• Category I – Rs. 5 cores
• Category II – Rs, 50 lakhs
• Category III – Rs. 20 lakhs
• Category IV – Nil
 Code Of Conduct
• Should make all efforts to protect the interest of
investors.
• Should maintain high standards of integrity,
dignity and fairness in conduct of business.
• Should fulfill all obligations in a professional and
ethical manner.
• Should not discriminate among the clients.
• Should endeavor to ensure that the inquiries,
grievances are adequately dealt with in a timely
and appropriate manner.
• Should ensure that prospectus/letter of offer is
available to investors at the time of issue.
 Code Of Conduct (cont)
• Should render best possible advice to its clients.
• Any penal action taken by SEBI
should be informed to its clients.
• Should inform the Board about legal proceedings
initiated against it.
• Should abide by the rules of SEBI, 2003.
• Should ensure that any person it employs should
have the capacity to be a merchant banker.
• Should not create false market.
 Obligations And Responsibilities
• Merchant banker not to associate with any business other than
that of the securities market.
• Maintenance of book of accounts, records, etc. Every merchant
banker shall keep and maintain the following books of
accounts, records and documents namely:
• A. a copy of balance sheet at the end of each accounting period
• b. A copy of profit and loss account for that period
• c. A copy of auditor’s report on the accounts of that period
• d. a statement of financial position
• Submission of half-yearly results.
• Report on steps taken on auditor’s report.
• Acquisition of shares prohibited.
• Information to the Board.
• Disclosure to the Board
Short Answer Question:-
1.Define merchant banking Services.
2.Explain the obligations and responsibility of merchant bankers.

Long Answer Question:-

1.Exlain various kinds of Services provided by merchant bankers
2.What are the various code of conduct for merchant bankers.
3. Describe classification of merchant bankers and what are there capital
adequacy norms.

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 References
• [1] M. P. Groover, Automation, Production Systems, and Computer Integrated
Manufacturing, Prentice-Hall of India Private Limited, New Delhi-110001,
India, pp. 56-60, 1989
• [4] J. Pappas, and E. Brigham, Fundamentals of Managerial Economics, CBS
College Publishing, New York, pp. 240-295, 1981
• Financial Services by M Y Khan, McGraw Hill Education (India) Pvt Ltd, 2013
• Merchant Banking by H.R. Machi Raju, New Age International (P) Ltd.,
Publishers, 2010

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