MERCHANT BANKINGMerchant banking may be defined as an ‘institution which covers awide range of activities such as underwriting of shares, portfoliomanagement, project counseling, insurance etc…They render allthese services for a feeORIGIN :The term merchant banking originated from the London who startedfinancing foreign trade through acceptance of billsLater they helped government of under developed countries to raiselong term fundsLater these merchants formed an association which is now called”Merchant Banking and Securities House Association”
SERVICES OF MERCHANT BANKERSPROJECT COUNSELLING :It includes preparation of project reports,deciding upon thefinancing pattern, appraising the project relating to its technical,commercial and financial viability. It includes filling up ofapplication forms for obtaining funds from financial institutions.LOAN SYNDICATION :Assistance is rendered to raise loans for projects after determiningpromoter’s contribution. These loans can be obtained from a singleinstitution or a consortium.
ISSUE MANAGEMENT :Management of issues involves marketing of corporate securities ie…equity shares, preference shares and debentures by offering them topublic.Pre-issue activities:They prepare copies of prospectus and send it to to SEBI and then filethem to Registrar of CompaniesThey conduct meetings with company representatives and advertisingagencies to decide upon the date of opening issue,closing issue,launchingpublicity campaign etc..They help the companies in fixing up the prices for their issuesPost-issue activities:It includes collection of application forms,screening ofapplications,deciding allotment procedure,mailing of allotmentletters,,share certficates and refund orders
UNDERWRITING OF PUBLIC ISSUES :Underwriting is an insurance to the company which makes publicissues.Raising of external resources is easy for the issues backedby well known underwriters.MANAGERS,CONSULTANTS OR ADVISERS TO THEISSUE :SEBI insist that all issues should be managed by atleast oneauthorised merchant banker but not more than two.For an issue of100 crores,upto a maximum of four merchant bankers shall beappointed.They help in listing of shares in stock exchange,completion of formalities under Companies Act etc..
PORTFOLIO MANAGEMENT :Portfolio refers to investment in different kinds of securities suchas shares,debenture issued by different companies.It is acombination of assets but a carefully blended asset combination.Portfolio management refers to maintaining proper combinationof securities in a manner that they give maximum returnInvestors are interested in safety,liquidity and profitability of hisinvestment but they cant choose the appropriate securities.Somerchant bankers help their investors in choosing theshares.They conduct regular market and economic surveys.
NRI INVESTMENT :NRIs has to follow lots of complicated rules for investing in theshares in India.Merchant bankers help them in choosing the sharesand offer expert advice fulfilling government regulations thusmobilising more resources for corporate sector.ADVISORY SERVICE RELATING TO MERGERS ANDTAKEOVERS :Merger is a combination of two or more companies into a singecompany where one survives and other loses its existenceTakeover is the purchase by one company acquiring controllinginterest in the share capital of another companyMerchant banker acts as middlemen between offeror andofferee,negotiates mode of payment and gets approval fromgovernment.
OFF SHORE FINANCE :Merchant bankers help their clients in :Long term foreign currency loanJoint venture abroadFinancing exports and importsForeign collaboration arrangement
BANKS PROVIDING MERCHANT BANKING SERVICES ININDIACommercial banksForeign banks like National Grindlays Bank, Citibank, HSBC banketc..Development banks like ICICI,IFCI,IDBI etc..SFC , SIDCsPrivate firms like JM Financial and Investment service , DSP FinancialConsultants, Ceat Financial Services,Kotak Mahindra, VMC ProjectTechnologies,Morgan Stanley,Jardie Fleming,Klienwort Benson etc…
MERCHANT BANKING REGULATIONS :Certificate from SEBI is a must.They are of four types:Category I merchant bankers : Can act as Issue managersCategory II merchant bankers : can act only as co-managersCategory III merchant bankers : can act as co-managers but cannotundertake portfolio managementCategory IV merchant bankers :can merely act as consultant oradvisor to issue of capitalCAPITAL ADEQUACY NORMS :Category I : Rs. 5 croresCategory II : Rs.50 lakhsCategory III : Rs.20 lakhsCategory IV : Nil
GUIDELINES FOR MERCHANT BANKERS :SEBI’s authorization is a must to act as merchantbankers.Authorisation criteria include Professional qualification in finace,law or business management Infrastructure like office space,equipment and man power Capital adequacy Past track of record,experience,general reputation and fairness inall transactionsEvery merchant banker should maintain copies of balancesheet,Profit and loss account,statement of financial positionHalf-yearly unaudited result should be submitted to SEBIMerchant bankers are prohibited from buying securities based on the
SEBI has been vested with the power to suspend or cancel theauthorisation in case of violation of the guidelinesEvery merchant banker shall appoint a ‘Compliance Officer‘ tomonitor compliance of the ActSEBI has the right to send inspecting authority to inspect books ofaccounts,records etc… of merchant bankersInspections will be conducted by SEBI to ensure that provisions of theregulations are properly compliedAn initial authorisation fee,an annual fee and renewal fee may becollected by SEBIA lead manager holding a certificate under category I shall accept aminimum underwriting obligation of 5% of size of issue or Rs.25 lakhswhichever is less
CODE OF CONDUCT :Should make all efforts to protect the interest of investorsShould maintain high standards of integrity,dignity and fairness inconduct of businessShould fulfill all obligations in a professional and ethical mannerShould not discriminate among the clientsShould ensure that prospectus, letter of offer etc.. is available toinvestors at the time of issueShould render best possible advice to its clientsAny penal action taken by SEBI should be informed to its clients
Should inform the board about any legal proceedingsinitiated against itShould abide by the rules of ‘‘Securities and ExchangeBoard of India Regulations,2003 “Shall develop its own internal code of conduct forgoverning its internal operationsShould ensure that any person it employs should have thecapacity to be a merchant bankerIt is responsible for the act of its employees and agentsShould not create false market
SOME PROBLEMS OF MERCHANT BANKERSSEBI stipulates high capital adequacy norms forauthorisation which prevents young,specialisedprofessionals into merchant banking businessNon co-operation of the issuing companies in timelyallotment of securities and refund of application of moneyetc.. is another problemYet merchant banking is vast but should develop adequateexpertise to provide a full range of merchant bankingservices