N N NN NN

CO

N
 28
F1ACA AIKA
2.1,/BASIcs OF MERCHANT BANKINGA
Merchant banking s a relatively new concept in the area of financiat
services in India. It caters to the nceds of trade and industry by acting as
intermediary, consultant, financial and liaison agency, f a business has the
capital (money) to purchase all that is needed to operate the business, there i
no need for financing, whether debt or equity, Many businesses neither have
adequate funds for this, nor have enough tirne.Ing EZpgctation that the
business will generate money at some tirme in the future to repay the arount
lent or invested, plus a return to the owner of the funds, is the bav,
banking.
Those with the ideas or the skills to operate the business may not have the
money, and those with the money rmay not have the skills, time or desire to
Operate the business successfully. Historically, if the bank lends the money, it
is commercial banking. If the bank is the agent that brings those with money
together with those who need it, it is investment banking, sometímes called
merchant banking because merchants were the first to need this type of
funding.
2.2. MEANING

/Tfe dictionary meaning of 'Merchant Bank' is:

"An organlsation that underwrítes corporate securities and advises
cllents on issues lIke corporate mergers, etc. involved in the ownership
o fcommerclal ventures"

A standard definition to the word 'Merchant Banking' is given under:

"Merchant banking means any person who is engaged in the

business of issue management either by making arrangements
regarding selling, buying, underwriting or subscribing to the securities
underwriter, manager, consultant, advisor or rendering corporate
advisory servicesin relationto such issue management"
Observe the following points, which are helping you to understand a very
confusing word in a clear way:

1. Merchant bank is simply an organisation. Individuals are not caleu

merchant banker rather he is called a broker. There is a suDu
between these two terms, which is beyond the scope or OU
difference o
study.
ssue
2. The merchant banker generally is engaged in a business of 5
pany
management. You may ask what an issue management is. Every comhe
Th
depends on intermediary to get money from the potential investor.t htiee
company cannot go and catch hold of potential investor. Here c o f
role of merchant banker. The merchant banker sells the shareie
Company to the public, or it may buy the shares from such cofmde
for resale, or it may subscribe to the securities. Whatever be tne
 MERCHANT BANKING 29

merchant banker is
of getting money from the public, the intention of
to help companies.
the role of manager, consultant,
3. Therefore, the merchant banker plays advice with
and advisor. Sometimes the merchant bank
extends only
respect to the issue management.
business? It is a good question
Is it that simple to do the merchant banking
bankers in India have diversified their
activities
at this point. Merchant
syndication. They also stretch their
beyond issue management and loan functions.
activities beyond these two major They have diversified into
project counselling,
portfolio management, corporate counselling, and procuring venture capital to
consultantcy to ailing sick units, providing
debenture trusteeship, arranging
new entrepreneurs, lease financing,
in detail elsewhere in the chapter.
finances, etc. You will know each function
world context are listed in
The possible services of merchant banks in the
the following table:

Table 2.1: Services Rendered by Merchant Banker

SI. No. | Possible Services

1. Corporate Counselling
Studies
2 Project Counselling and Pre-investment
3. Capital Restructuring
4. Credit Syndication and Project Finance
5. Issue Management and Underwriting
6. Portfolio Management ib
7. Non-resident Investment

8. Working Capital Finance

9. Acceptance Credit and Bill Discounting
10. Mergers, Amalgamations and Takeovers 2lnsd
11. Venture Capital Financing
12. Lease Financing
13. Foreign Currency Finance
14. Fixed Deposit Broking
15. Mutual Funds Floatation and Management

16. Arrange for Rehabilitation of Sick Projects

2.3./ORIGIN OF MERCHANT BANKING
sthe concept of merchant banking borrowed from others? Alternatively,
were they evolved in India itself? If so, when was it evolved? What kind of
activities did they carry out in those days? Let us try to find answers to these

questions.
The concept of merchant banking originated in 13th-century in Italy. The
first-known firms to have been involved in merchant banking were Riccad
of Luca, Medici, Fugger, and so on.
30
FINANCIAL SERVICES
Functional Nature of Merchant
Banking of Old Era
In olden
times, merchant banks were also known
issuing houses" in the U.K. and as
"accepting and
Except for this distinction in "investment banks" (1B) in the USA.
difference between them. nomenclature, there is no essential
goods on a commission basis Usually, they handled coastal trade andfunctional
they charged heavy interest. and financed risky venture projects, for master's
bills for payment. These They often incurred heavy losses. which
of commercial banking. were in addition to
their They accepted
Merchant Banking functions
In fact, there was
no distinction
and commercial banks until 1932.between the functions of merchant banking
distinguished the functions of merchantLater, the Glass
Steagall Act,
banking or investment banking1933,
commercial banking. However, in
2000, the Clinton Administration from
investment banks to run the functions
usual functions of investment of commercial banks in allowed
addition to their
amendment in the Glass banking. This was
effected through
Steagall Act. an

Origin of Merchant Banking in

horabnef eosirse f8 oldaT
India
Prior to the enactment of the
Indian Companies Act,
agencies acted as an issue house for securities. 1956,
before promoting them. They They evaluated themanaging
projects
the venture capital in a smalldesigned the capital structures. They provided
FeW
merchant bankers with small way.base. share broking firms functioned as
capital
National Grindlays Bank in India initiated
1969. The Citibank followed it in 1970. The merchant banking services in
Indian commercial bank to set State Bank of India was the first
up separate Merchant
a
1973. ICICI followed it in 1974. Both Banking Division in
these Indian merchant bankers
as leaders in merchant
banking having done significant business emerged
period 1974-85 in comparison to foreign during the
banks. A number of commercial
banks, financial institutions and other
providing merchant banking services. The organisations
merchant
are now
banks
engaged in
in India operate as
issue houses rather than
full-fledged merchant banks.
Somewhere above, you have read that there is no
functions of merchant banking and commercial difference between the
difference between twothese
banking. What makes the
terms? A well-timed
are given for clarity purpose. question. A few differences
Difference between Merchant Banks and Commercial
nA t
Banks
Merchant banking is the forerunner of modern
commercial banking. Its
foundational value is being increasingly
recognised and its resurrection
seriously considered. The proof is that this ancient form of merchant banking
has begun to make a comeback in the
UK and the USA. Particularly when the
limitations of contemporary commercial banks are
in the face of gradually showing through
certain practical problems of present-day commercial banking.
1. The basic difference between merchant
banking and advice and
banking is that the merchant bank offers mainly financial commercial
 MERCHANT BANKING 31

services for a fee. It also collects deposits through the non-cash mode
of finance, i.e., security papers. Commercial banks accept deposits and
lend money in the mode of cash.
2. The merchant bank offers portfolio services to its customers
(individuals and corporate). The commercial bank provides retail
trade banking services to its customers.
3. The regulatory body for commercial banks in India is Ministry of
Finance/Reserve Bank of India. The Banking Regulation Act has also
guided those banks. On the other hand, the regulatory body for
merchant banks in India is the Securities Exchange Board of India
(SEBI). They define merchant banking as follows:

"Merchant banks mostly provide advisory services, issue

management, portfolio management and underwriting, which require
less capital but generate more income (non-interest income)."

Since these services require fewer funds, commercial banks could opt
to provide these services side by side with their traditional services/
functions. Merchant banking services reduce the pressure of
supervision/ monitoring activities that reduce the related cost.
4. Merchant banks invest their funds mostly in project-oriented and
security papers. These security papers are encashable in the stock
market. This will solve the liquidity crises of merchant banker. The
liquidity problems of commercial banks cannot easily be solved as they
lend their funds to the trading or commercial houses in the form of
Term Loan, Working Capital, etc.
mo
How should the liquidity problem of commercial bank be solved?
The commercial banks in India should think of entering in the field of
merchant banking. Considering the practical problems of cost and liquidity
issues,,commercial banks should go for merchant banking operation.

2.4 REGISTRATION OF MERCHANT BANKER0udzeih bref8reosi E

Registration with SEBI is mandatory to carry out the business of merchant
banking in India. An applicant should comply with the following norms:
bne 1. The applicant should be a body corporate.
2. The applicant should not carry on any business other than those
connected with the securities market.
3. The applicant should have necessary infrastructure like office space,
equipment, manpower, etc.
4. The applicant must have at least two employees with prior experience
in merchant banking.
5. Any associate company, group company, subsidiary or inter connected
company of the applicant should not have been a registered merchant
banker.
 FINANCIAL SERVICES

32
involved in any securities scam o
have been
should not
6. The applicant for offence.
any of Rs. 5
proved guilty
crores
minimum net worth
should have a
7. The applicant
ACTIVITIES
BANKING
MERCHANT
OF
2.5. SCOPE
banking activity
helps general public
into
Merchant
financial surplus of the
channellising
the
(a) Inproductive investment avenues.

intermediaries to the share

of various
activities printers,
the
To coordinate advertising agency,
(b) the registrar,
bankers,
issue such as
underwriters, brokers, etc. the
rules and regulations governing
compliance with
(c) To ensure the

MERCHANT BANKER
2.6. FUNCTIONS OF A
merchant banker:
main functions of a
/The following comprise the

A. Management of debt and equity offerings assists the

of the merchant banker. He
This forms the main function of work in
from the market. The main areas
companies in raising funds registration
designing, pricing the issue,
this regard include: instrument of the issue,
support, marketing
of the offer document, underwriting
allotment and refund, listing on stock exchanges.h
2. Promotional activities
of industrial enterprises in
A merchantbank functions as a promoter
an idea, identification of
India. He helps the entrepreneur in conceiving
projects, preparing feasibility reports, obtainihg Government approvals,
and incentives, etc. Some of the merchant bankS also provide for technical
and financial collaborations, not joint ventures.
3. Placement and distribution
The merchant banker helps in distributing various securities like
equity shares, debt instruments, mutual fund products, fixed deposits.
insurance products, commercial papers to name a few, The distribution
network of the merchant banker can be classirled as institutional and
retail in nature. The institutional network Consists of mutual funds.
foreign institutional investors, private equity funds, pension funde
financial institutions, etc. The size of such a network represents th
wholesale reach of the merchant banker. The retail network depends
networking with investors. on

4. Corporate advisory services

Merchant bankers offer customised solutions to their clients'
financial
problems. The following are the main areas in which their advice i
sought: is
 33
MERCHANT BANKING

debt-equity ratio
determining the right s t r u c t u r e theory
includes
Financial structuring The appropriate capital
ratio for the client. the refinancing
and gearing also explore
bankers
Merchant of funds.
is also framed. evaluate cheaper sources

alternatives of the client, and another area of

is yet
and turnaround management
Rehabilitation
merchant bankers may
design a
case of sick units,
merchant banking. In financial institutions.
coordination with banks and
revival package in advice from a
merchant
is another area where
Risk management
on different hedging
strategies and
advises the client
banker is sought. He
suggests the appropriate strategy.

services
5. Project advisory project
various stages of the
Merchant bankers help their clients in project
clients. They assist them
in conceptualising the
undertaken by the conduct feasibility
the idea is formed, they
idea in the initial stage. Once also assist
to examine the viability of the proposed project. They
studies
different documents like
the detailed project
the client in preparing
report.
6. Loan syndication takes
loans for their clients. This
Merchant bankers arrange to tie up of the client's
First, they analyse the pattern
place in a series of steps. terms of borrowings can
be defined. Then
cash flows, based on which the which is
a detailed loan memorandum,
the merchant banker prepares invited
financial institutions and they are
circulated to various bankS and terms of
The banks then negotiate the
to participate in the syndicate.
final allocation is done.
lending based on which the
7. Providing venture capital and mezzanine financing
bankers help companies in obtaining
venture capital
Merchant
and innovative strategies.
financing for financing their new

8. Leasing Finance
facilities to their clients.
hMerchant bankers provide leasing finance
9. Bought out deals
It involves a deal where the entire securities are bought in lots. It is
done with an intention of offloading them later in the market. The deal is
done in two stages-first, the client issues shares to the retail investors at
a higher price. The merchant banker is required to appraise the project,
invest in the client and offer the shares to the public for subscription.. The
merchant banker has the lucrative possibility of picking up the difference
between the price at which they bought the shares from the client and the
public offer price. The client, on the other hand, need not wait for months
together to use the issue proceeds and gets an attractive price for his
shares. In addition, it allows companies to raise capital without facing the
uncertainties of the market place.
34
FINANCIAL SERVICER
10. Non-resident Investment
The merchant bankers provide investment advisory
of identification of investment opportunities, selection
vices in terms
services terme
of securitiee
portfolio management, etc. to attract NRI Investment inthe primary and
secondary markets. They also take care of the operational details like
Purchase and sale of securities securing the necessary clearances from
RBI under FEMA for repatriation of interest and dividends, etc.

11. Advisory services relating to mergers and acquisitions

Mergers and takeovers are very popular in these days. There may be
several reasons for mergers and acquisitions. They vary from elimination
of competition, expansion of capital through tie-ups and to go global.
Merchant bankers play very important role in the field of mergers and
takeovers.
12. Portfolio management
Merchant bankers offer services not only to the clients issuing the
securities but also to the investors. They advise their clients, mostly
decisions. Merchant bankers
institutional investors, regarding investment
e v e n undertake the function of purchase
and sale of securities for their
clients to provide them:
of takeovers,
(a) to identify the potential targets to financial
with respect
(b) to appraise the merger/takeover proposals
viability and technical feasibility,
(c) to negotiate with interested parties,
consideration and the appropriate exchange
(d) to determine the purchase
ratio, aspects, and
related to procedural and legal
(e) to assist in matters

to obtaining necessary
approvals. pn
( of these restructuring
achieve the objectives
clients activities at
To help participates in different
banker
merchant behind the
strategies, the understanding the objectives
include or
various stages. They to obtain financial, marketing,
could be either the
in
strategy (objectives in searching for the right partner
and help
production benefits), valuation of the proposal.
ftrateaiGdecision and financial
 An exISting USted Compay Can Taise Uesn Capltal oy Treely pricing9
further issue.

2.12 CopEOF CONDuCT FOR MERCHANT BANKERS

THereis a legislation to the code of conduct, if there is a profession.
prescribe
SEBI prescribes code of conduct for merchant bankers.
They are as follows:
1.A merchant banker in the conduct of his business shall observe
high
standards of integrity and fairness in all his dealings with his clients
and other merchant bankers.
2. A merchant banker shall render at all times
291912 high standards of service,
exercise due diligence, ensure proper care and exercise
independent
professional judgement. He shall, wherever necessary, disclose to the
46 FINANCIAL SERVICES
clients, possible sources of conflict of duties and interests, whil
providing unbiased services.
3. A merchant banker shall not make any statement or become
privy to
any act, practice or unfair competition, which is likely to be harmf
to the interests of other merchant bankers or is
likely to place
other merchant bankers in a disadvantageous position in relation such
to the
merchant banker, while competing for or executing any
4. A merchant banker shall not make
assignment,
any exaggerated statement, whether
oral or written, to the client either about the
qualification or
capability to render certain services or his achievements in regardthe to
services rendered to other clients.
5. A merchant banker shall
always endeavour t o
(a) render the best possible advice to the clients having
clients' needs and the environments and his own regard to the
skill; and professional
(b) ensure that all professional dealings are effected in a
efficient and cost effective manner. prompt,
6. A merchant banker shall
not ehenog
(a) divulge to other clients, press or any other
information about his client, which has come party
to his
any confidential
(b) deal in securities of any client knowledge; and
company without
ad to the Board as
required under the regulationsmakingand
disclosure
also to the
Board of Directors of the client
7. A merchant banker shall endeavour
company.
to ensure that-
(a) the investors are provided with true and
without making any misguiding or adequate information
made aware of attendant risks before exaggerated claims and are
taken by them; any investment decision is
(b) copies of
prospectus, memorandum and related
made available to the investors; literature are
c) adequate steps are
taken for
of application money withoutfair allotment of securities and refund
delay; and
complaints from investors are adequately dealt
(d)
The merchant
bankers shall not generaily and with.
of issue of any securities be party to - particularly in resnect
noie (a) creation of false market;
(b) price rigging or manipulation;
b(c) passing of price sensitive information to hroa
stock exchanges and other player in S,
any other action which is unethical or
the
capital members of the
unfair to the market or take
of the investors.
9, A merchant banker shall abide by the
which be applicable and provisions
Jsboso regulations may
odtor o carried on by the merchant banker.
relevant to Act,
the
rules and
activities
ES 47
MERCHANT BANKING
le
2.3 REGISTRATION CHARGEs
According to SEBI, the charges payable by the merchant bankers are as
under
ul
h (a) Category I Merchant Banker
e
A sum of Rs. 2.5 lakhs to be paid annually for the first two years
commencing from the date of initial registration and thereafter for the third
year a sum of Rs.1 lakh to keep the registration in force.

(b) Category Il Merchant Banker

A sum of Rs. 1.5 lakhs to be paid annually for the first two years
commencing from the date of initial registration and thereafter for the third
year a sum of Rs. 50,000 to keep the registration in force.

(c) Category ll Merchant Banker

A sum of Rs 1 lakh to be paid annually for the first two years commencing
from the date of initial registration and thereafter for the third year a sum of
Rs. 25,000 to keep the registration in force.

(ad) Category IV Merchant Bankers

Sum of Rs. 5,000 to be paid annually for the first two years commencing
from the date of initial registration and thereafter for the third year a sum of
Rs. 1000 to keep the registration in force.

2.14.
SuMMARY OF THE SEBI GUIDELINES ON MERCHANT BANKING
10bjectives of Merchant Banking Regulations
The following are the objectives of Merchant Banking Regulations:
(6)
1. It regulates the raising of funds in Primary
2. It assures the issuer
Market.
a market for raising resources at low cost,
effectively and easily.
3. It ensures a high degree of protection to the interests ofthe investors.
4. It provides for the merchant bankers a
dynamic and competitive
market with high standard of professional
competence, honesty,
integrity and solvency.
It ensures a fair, efficient and flexible
primary market to all involved
in the process of primary issue.

2. Authorised Activities

Thelegislation authorises some activities to façilitate merchant

They are banking.
1. Issue management
It consists of
the
preparation of prospectus and other information relating to
bode
(a) Issue of shares and securities.
48 FINANCIAL SERVIcES

D) Determining financing structure. DA G e

(c) Tie-up of finances.
(d) Final allotment.
(e) Refund of subscriptions.
2. Corporate advice
It consists of advising the company on the issue.
3. Managing, consultation and advising
It covers all the three aspects related to issue and underwriting.
4. The other authorised activities will be portfolio management services.

3. Method of Authorisation
The criteria for authorisation considers
(a) Professional qualification in finance, law or business management.
(b)
(b) Adequate office space, equipment and manpower.
(C) At least two persons to be employed with experience to carry on the
business of merchant banking.
(d) Capital adequacy.
(e) Previous track record, experience, general reputation and fairness
in all their transactions.

4. Terms of Authorisation

The following terms are laid down in SEBI Guidelines regarding

authorisation
(a) There are four categories of Merchant banks. The first three levels
are determined according to the net worth expressed in rupee value.
They are Rs. 5 crores (with effect from 7 February 1995), Rs. 50
lakhs and Rs. 20 lakhs respectively. There is no prescription of
rupee limit for fourth category.
(b) The authorisation is valid for an initial period of 3 years.
(c) SEBl collects the initial authorisation fees, an annual fee and renewal
fee.
(d) At least one authorised merchant banker, as a sole manager or lead
manager, should manage all issues. The number of lead merchant
bankers for issues upto RS. 50 crores is restricted to two. If
the
issue goes to Rs. 400 crores and beyond, the numbers
five. If the issue is below Rs. 50 may go upto
merchant bankers.
lakhs, companies
need not appoint
(e) The specific responsibilities of each lead manager must be
submitted
to SEBl prior to the issue.
( Merchant bankers should exercise duediligence independently. They
should verify the contents of the prospectus and
reasonableness
views expressed therein. SEBI expects a certificate from
of the
regarding it.
him
M E A C H A N TB A N K I N G

Marchant Bank 49
(9) Th
This iis Regulations
with a view to
link issue
ensuring a management
underwriting.
ers in the issue with
managed by stake of
to accept a them. Lead
managers to merchant
khs in the issueminimum
require
of 5% issue are
Rs. 25 underwriting obligation or
subject to a ceiling.
(h) Ot intermediaries generally handle
erchant Banking regulations ensurepost-issue services.
bankers in post-issue services involvement
ttoo. eMerchant
involvement However,
services
nonsible for ensuring timely refundserchantand allotment
of merchant
barkererchant
of securities
be
resp
tothe investors
investors and listing of the
instrument on the stcck
Merchant bankers should submit to SEBI exchange.
and as be whatever
returns reports may prescribed and called for. information,
Merchant bankers should adhere to a code of
SEBI now and then. conduct prescribed by
Ih SEBI suspends or
quidelines. Merchantcancels
Bankerauthorisation in case of violation of the
has also a chance to
Government of India against the orders of SEBI. make an appeal to
5. Prospectyus
AheRegistrar of Companies(Companies Act, 1956) is
herchant banker, who Is authorised by SEBI, only can file theadvised that the
which, each merchant banker is assigned a code number prospectus, for
prospectus is in contravention of provisions of any law or by SEBI. If the
statutory rules and
regulations, SEBI can instruct the Registrar of Companies not to such register
prospectus.

6. Four Categories of Merchant Bankers

ol 000.2
Category classification was applicable between
below level one were abolished 1991-1996. All categories
by SEBl on 5 September 1997. One could see
0n1ly one category in the list
published by SEBI every year. This is due to the
amendments made in this regard. As a student, one should know about all these
categories originally evolved by the Board. The range of activities and their
responsibilities are mentioned below:
Category Activities and Responsibilities
First 1. Issue Management.
2. Preparation of prospectus.
3. Determining the financial structure.
4. Tie-up of financiers
5. Final allotment and refund of the subscription amount.
6. Manager, advisor, or consultant to an issue.
7. Portfolio manager and
8. Underwriter.
 FINANCIAL SERVICE

50
1. Co-manager.
Second
2. Advisor
3. Consultant. uie o
4. Underwriter.

5. Portfolio Manager. issue.

concerned with an
are
All these capacities
1.Underwriter.
Third
2Advisor.
,
3. Consultant. with an issue.
are c o n c e r n e d
All these capacities
1. Advisor.
Fourth
2. Consultant.
an Issue.
are concerned with
Two capacities

Merchant banker
to be
7. Registration Fee chapter.
section 2.13 of this
About registration fee, refer to

8. Renewal Fee and

in first two years
Rs. 1 lakh is to be paid annually
(i) Category I, 192
thereafter Rs. 20,000.
from third
first two years and Rs. 10,000
(ii) Category Il, Rs.75,000 for
be collected by SEBI.
year onwards will from third
ll, Rs. 50,000 for first two years and Rs. 5,000
(iin) Category
year onwards will be collected by SEBI.
Rs. 5,000 for first two years and Rs. 2,500
from third
(iv) Category IV,
year will be collected. barielbd S19.5ou 9ie
9.LeagManagers
Ahe appointed depends on the size of the
number of lead managers to be
pdblic issue. The guidelines stipulate that for an issue upto Rs. 50 crores, the
umber of lead managers should not exceed two. Forissues between Rs. 50, and
Rs. 100 crores, it is three. For issues between Rs. 100 and Rs. 200 crores,
the prescribed limits is four. If the issue is above Rs. 200 crores but less
than Rs. 400 crores, the limit is five. And above Rs. 400 crores, five or as
may be agreed by SEBI will be the limit.

10. Code of Conduct

dto qu
About cgde of conduct, refer to section 2.12 of this chapter.

11/0bligation and Responsibilities of Merchant Banker

Thefollowing are the general obligations and responsibilities of merchant
bankers.
MERCHANT BANKING
51

1. He should keep and maintain a copy of the balance sheet, a copy of the
auditor's report and a statement of financial position. Merchant
bankers should inform SEBI where the accounts, records and documents
are maintained.

2. He should furnish final statements and such other documents to SEBI.

3. He should .submit half-yearly working results to SEBI with a view to
monitor their capital adequacy.

12. Respohssbilities of Lead Manager o

Léadmanagersshould not agree to manage any issue. He may be allowed to
dosoif he fulfils the conditions laid down by SEBI. They are
(a) Lead merchant banker in Category I should accept a minimum
underwriting obligation of five per cent of the total underwriting
commitment or Rs. 25 lakhs.
(b) The lead merchant banker should submit a due diligence certificate
about verification of prospectus to SEBI at least two weeks before
opening of an issue
(c)The lead merchant banker should submit the following documents
( Particulars of issue and draft prospectus.
(ii) Any. other literature intended to be circulated to the
investors including .the shareholders and
(ii) Such other documents relating to prospectus or letter of
offer as the case may be.
These documents should be furnished at least two weeks before filing the
draft prospectus with Registrar of Companies.

13,Acguisition of Shares
Merchant banker should submit. particulars of any transaction for
acquisition of shares of a company-whose issue is managed by them within 15
ays from the date of entering in such transaction.
Lead managers are permitted by SEBI from September 1995 onwards to
Take a stake of upto 5% of the company's post issue equity issues. This stake
wOuld be from the reserved category of shares for institutional investors and
other corporate bodies.
14,Prooedure for Inspection stn arolarl, tugde notens
(a) Inspection
EBI may inspect books of accounts, records and documents of merchant
ba
ers to ensure that the books of accounts are maintained in the required
inner SEBI may investigate complaint against the merchant banker. it may
intgate suo moto in the interest of securities business or investors
e s t into the affairs of the merchant banker. SEBl may either give
rea
vDlenotice or undertake inspection without notice in the interest of
O S h e findings of inspection report are communicated to merchant
 FINANCIAL SERVICES
52 into the books and
to investigate
a qualified auditor
banker. SEBI may appoint
affairs of merchant banker. for registration and
of conditions
Penalities of
non-compliance regulations include
the merchant banking
Contravention of the provision
of defaults and the
registration. SEBI has classified
cancellation of
Suspension or
attract.
penalty points they
Default of Merchant Bankers
and Penalty points
(b) Penalty Points
S. No Defaults
1
1. General
2
2. Minor
3
3. Major
4
4. Serious
(c) General Defaults
the general defaults. It attracts one penalty point.
The following are

prospectus from the lead manager by SEBI

(a) Non-receipt of draft
before filing it.
inter-se allocation of responsibilities of lead
(b) Non-receipts of issue.
manager in by SEBI, before opening of the
an issue
of the issue.
(c) Non-receipt of due diligence certificate before opening
to ensure submission of certificate of minimum 90%
(d) Failure
subscription to the issue required.
(e) Failure to ensure publicising of dispatch of refund orders, securities
certificates, filing of listing application by the issuer.

(d)Minor Defaults
The following are the minor defaults attracting two points.
(a) Promotional materials not being in conformity with contents of the
prospectus.
(b) Exaggerated information being given in the prospectus.
(c) Failure to substantiate matters contained in highlights to the issue in
the prospectus.
(d)Failure to exercise due diligence in verifying contents of prospectus.
(e) Failure to give adequate and fair disclosure to investors and objective
information about risk factors in the prospectus.
( Delay in refund of securities.
(g) Non-handling of investors grievances promptly.
(e) Major Defaults
The following are the major defaults fetching three points.
1. Mandatory underwriting not taken up by lead manager.
2. Excess number of lead
managers
 53

ES MERCHANT BANKING

nd (F) SERIOUS DEFAULTS

It fetches
serious default.
classified under
activities are
The following
ond points: o r violation
of code of
four penalty banker
de practice by
merchant
1. Unethical
ne conduct. desired information,
with SEBI in furnishing
2. Not cooperating be called for.
and evidence a s may
documents,
cumulative penalty points of eight
banker on reaching the c a n c e l l a t i o n of
A merchant of suspension or
SEBI in terms
attracts action from
authorisation.

15. ENQUIRY

inquire
SEBI to into the defaults
An enquiry officer is appointed by
to the merchant
merchant banker. He issues notice in this regard
of a evidences sought
furnish a reply with
banker. Merchant banker may
officer gives reasonable
Board within thirty days. The enquiry
by
to explain. The merchant banker
can appear
opportunity to the banker officer submits
through others. Based on the enquiry, the
personally or

a report to the board.

16. ACTION BY SEBI Oe

initiates an action:
On receipt of report from enquiry officer, board
banker has to
(a) It issues a show-cause notice. The merchant
respond to the notice within twenty-one days. The board acts
on the response not later than thirty days. It issues an
order
with reasons for levying penalty.
(b) The merchant banker ceases to carry business on and from the
date of the suspension.
(c) The order of suspension shall be published in atleast two daily
newspapers by the board.
(d) Aggrieved person may apply to the Central Government against
the order.
2.15. TNDTAN FYDEPTENCE
 CHAPTER 17 Investment Bar

Othér Responsibilities
The lead merchant banker shall ensure that the despatch of share certificates/refund orders/and demat
eredit is completed and the allotment and listing of documents submitted to the stock exchanges within 2
cr

working days of the date of allotment.

The post-issue lead manager shall ensure that all steps for completion of the necessary formalities
for listing and commencement of trading at all stock exchanges, where the securities are to be listed, are
taken within 7 working days of the finalization of basis of allotment.
A lead merchant banker shall ensure the payment of interest to the applicants for the delayed dispatch
of allotment letters, refund orders, and so on, as prescribed in the offer document.
The post-issue lead merchant banker shall ensure that the dispatch of refund orders/allotment letters/
share certificates is done by way of registered post/certificate of posting, as may be applicable.
In case of all issues, an advertisement giving details relating to oversubscription, basis of allotment,
mumber, value and percentage of all applications received, including Applications Supported by Blocked
Amount, number, value and percentage of successful allottees for all applications including Applications
Supported by Blocked Amount, date of completion of despatch of refund orders/instructions to Self-certi
fied Syndicate Banks by the registrar, date of despatch of certificates and date of filing of listing application.
Such advertisement shall be released within 10 days from the date of completion of the various activities.
The post-issue lead merchant banker shall continue to be responsible for the post-issue activities,
till the subscribers had received the shares/debenture certificates or refund of application moneys and
the listing agreement is entered into by the issuer company with the stock exchange and listing/trading
permission is obtained.

CHANGHNG LANDSCAPE OF INVESTMENT BANKING

Some Leading
Investment banking was a lucrative businesstill 2007. The reveues during the year 2007 were the highest for
International
the investment-banking industry as a large numberof deals worth $61 billion were struck. However, the sub
Investment Banks
prime mortgage crisis took a toll on the global-investment banks. These investment banks were not under the Operating in India
control of either the Federal Reserve Bank or the US Securities and Exchange Commission (SEC), which
made it easier for them to take higher risks. Wall Street's oldest and biggest investment banks collapsed in the Goldman Sachs
late 2008 as a result of the financial turmoil. Bear Stearns was acquired by JP Morgan Chase in March 2008. Credit Suisse
Lehman Brothers filed for Chapter 11 Bankruptcy and was declared bankrupt in September 2008. The Asian Bank of America-
and European operations of Lehman Brothers were bought by Nomura and the North American Lehman Merill Lynch
of America for $50 billion. Goldman
City group Global
operations by Barclays Capital. Merill Lynch was acquired by Bank Markets India Pvt Ltd
Sachs and Morgan Stanley converted themselves into bank-holding companies or commercial banks.
on the Indian investment banks. There will be Barclay's Bank
The impact of the côllapse of these banks has been felt Morgan Stanley
a drop in big deals and fat fees and revenues. Even in the midst of this gloomy environment, investment
banks have opportunities which they can tap with properly designed strategies and go global. The growth
The world's No.1
Tate of the Indian economy has slowed down but it is fairly good when compared to the growth rate of
investment bank in
the developed countries. Even though the capital markets are in a dismal state, India is still an attractive
2009 was JP Morgan
banks have planned to start their operations in India. The
market for investment, Even foreign investment Chase&Co.
for survival and growth, such as focusing on kev
Indian investment banks need to design new strategies
markets and market segments, creating alliances with ho
business areas, exploring new and alternate the and new clients, giving quality
tique firms, developing strong and long-term relationship with exIsting
Or t n e r grown, niring qualified staff and promoting
advice to clients and assisting them in every stage

ethical behaviour.