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Merchant banking
1. Merchant Banking in India
Dr. Jamaluddeen (Jamal), Assistant Professor,
Department of Commerce, University of North Bengal
2.
3. 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 counselling,
insurance etc. They render all these services for a fee
ORIGIN
The term merchant banking originated from the London
who started financing foreign trade through acceptance of
bills
Later these merchants formed an association which is now
called ”Merchant Banking and Securities House
Association”
Origin of Merchant Banking in India is from 1967 and
started well functioning from 1970
5. SERVICES OF MERCHANT BANKERS
PROJECT COUNSELLING :
It includes preparation of project 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 institutions.
LOAN SYNDICATION :
Assistance is rendered to raise loans for projects
after determining promoter’s contribution. These
loans can be obtained from a single institution or
a consortium.
6. ISSUE MANAGEMENT
Management of issues involves marketing of corporate securities
i.e. equity shares, preference shares and debentures by offering
them to public.
Pre-issue activities: They prepare copies of prospectus and
send it to SEBI and then file them to Registrar of Companies
They conduct meetings with company representatives and
advertising agencies to decide upon the date of opening issue,
closing issue, launching publicity campaign etc.
They help the companies in fixing up the prices for their issues
Post-issue activities: It includes collection of application forms,
screening of applications, deciding allotment procedure,
mailing of allotment letters, share certificates and refund
orders
7. UNDERWRITING OF PUBLIC ISSUES :
Underwriting is an insurance to the company which
makes public Issues. Raising of external resources is
easy for the issues backed by well known underwriters.
MANAGERS, CONSULTANTS OR ADVISERS TO
THE ISSUE:
SEBI insist that all issues should be managed by at least
one authorised merchant banker but not more than two.
For an issue of 100 crores, upto a maximum of four
merchant bankers shall be appointed. They help in
listing of shares in stock exchange, completion of
formalities under Companies Act etc.
8. PORTFOLIO MANAGEMENT
Investors are interested in safety, liquidity and
profitability of his investment but they cant choose
the appropriate securities. So merchant bankers help
their investors in choosing the shares. They conduct
regular market and economic surveys.
Portfolio management refers to maintaining proper
combination of securities in a manner that they
give maximum return with minimum risk. Merchant
Bankers provide portfolio management services to
their clients.
9. NRI INVESTMENT
NRIs has to follow lots of complicated rules for
investing in the shares in India. Merchant bankers
help them in choosing the shares and offer expert
advice fulfilling government regulations thus
mobilising more resources for corporate sector.
ADVISORY SERVICE FOR MERGERS & TAKEOVERS
Merchant banker acts as middlemen between
offeror and offeree related with Amalgamation
(Merger and purchase), Acquisition, Takeover. It
negotiates mode of payment and gets approval
from government. It also works as advisor and
legal consultants
10. OFF SHORE FINANCE
Merchant Bankers provide services to a client
outside of one's national boundaries,
whether or not that location is land- or water-
based.
Merchant bankers help their clients in :
Long term foreign currency loan
Joint venture abroad
Financing exports and imports
Foreign collaboration arrangement
11. MERCHANT BANKER IN INDIA
• Commercial banks: SBI, Bank of Baroda, etc.
• Foreign banks: National Grindlays Bank, Citibank,
HSBC bank etc.
• Development banks: ICICI, IFCI, IDBI, SFC, SIDC, etc.
• Private firms: JM Financial and Investment service,
DSP Financial
• Consultants: Ceat Financial Services, Kotak
Mahindra, VMC Project
• Technologies: Morgan Stanley, Jardie Fleming,
Klienwort Benson etc.
12. MERCHANT BANKING REGULATIONS
Certificate from SEBI is a must. They are of four
types:
Category I: Can act as Issue managers (Rs. 5 crores)
Category II: Can act only as co-managers (Rs.50 lakhs)
Category III: Can act as co-managers but cannot undertake
portfolio management (Rs.20 lakhs)
Category IV: Can merely act as consultant or advisor to
issue of capital (Nil)
13. GUIDELINES FOR MERCHANT
BANKERS
SEBI’s authorization is a must to act as merchant bankers,
Authorization criteria include
• Professional qualification in finance, law or business Mgt.
• Infrastructure like office space, equipment and man power
• Capital adequacy
• Past track of record, experience, general reputation and fairness in
All transactions
Every merchant banker should maintain copies of (Financial
Statements) balance sheet, P/L account, statement of financial
position
Half-yearly unaudited result should be submitted to SEBI
Merchant bankers are prohibited from buying securities own name
14. SEBI has been vested with the power to suspend or
cancel the authorisation in case of violation of the
guidelines
Every merchant banker shall appoint a ‘Compliance
Officer‘ to monitor compliance of the Act
SEBI may send inspecting authority to inspect books of
accounts, records etc. of merchant bankers
An initial authorisation fee, an annual fee and renewal
fee may be collected by SEBI
A lead manager holding a certificate under category I shall
accept a minimum underwriting obligation of 5% of size
of issue or Rs.25 lakhs whichever is less
15. 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 fulfil all obligations in an ethical manner
Should not discriminate among the clients
Should ensure that prospectus, letter of offer etc. is
available to investors at the time of issue
Should render best possible advice to its clients
Any penal action of SEBI should be informed to its clients
16. Should inform the board about any legal proceedings
initiated against it
Should abide by the rules of SEBI Regulations, 2003
Shall develop its own internal code of conduct for
governing its internal operations
Should ensure that any person it employs should
have the capacity to be a merchant banker
It is responsible for the act of its employees and
agents
Should not create false market
CODE OF CONDUCT
17. PROBLEMS OF MERCHANT BANKERS
SEBI stipulates high capital adequacy norms for
authorization which prevents young, specialized
professionals into merchant banking business
Non co-operation of the issuing companies in
timely allotment of securities and refund of
application of money etc. is another problem
Yet merchant banking is vast but should develop
adequate expertise to provide a full range of
merchant banking services
18. INTRODUCTION
In India, Merchant bankers are a body corporate
who carries on any activity of the issue Mgt, which
consist of preparing prospectus and other
information relating to the issue. Merchant banks in
India are not allowed to conduct any business other
than that related to securities market.
The merchant banker are those financial
intermediary involved with the activity of
transferring capital funds to those borrowers who
are interested in borrowing.
19. GROWTH OF MERCHANT BANKING IN
Merchant Banking activity in India was started in 1967 and
formal merchant activity in India was originated in 1969
with the merchant banking division setup by Grind Lays
Bank (The largest foreign bank in the country).
The main service offered at that time to the corporate
enterprises by the merchant banks included the
management of public issues and some aspects of
financial consultancy.
After Grind Lays Bank, Citibank setup its merchant banking
division in 1970.
20. Continue …
Banking Commission in 1972 suggested that Indian banks
should offer merchant banking services as part of the
multiple services
State Bank of India (SBI) started the merchant banking
division in 1972.
ICICI set up its merchant banking division in 1973 followed
by a No. of other commercial banks like Canara Bank, PNB,
CBI, UCO Bank, etc.
Bank of India (BoI) and Syndicate Bank (SB) in 1977 set up
Merchant Banking Unit.
Bank of Baroda (BoB) started in 1978 & after that United
Bank of India (UBI) also started merchant banking services
21. Continue …
Since August 1990, merchant bankers engaged in issue
management, corporate advisory services, underwriting and
portfolio management have to obtain authorization from
SEBI after meeting the requirements of capital adequacy
norms.
In 1993, there were 568 merchant bankers in our country out
of which 312 were authorized by SEBI.
The number of registered merchant bankers with SEBI
increased to 422 at the end of August 1994.
The total number of merchant bankers in all categories
increased to 1163 by the end of 1997-988.
22. Continue …
Top 5 developments in merchant banking establishment in India are
Setting up of Banks Subsidiaries
SBI Capital Markets Ltd., was incorporated as the first such
subsidiary of SBI on 2nd July, 1986. Then Canbank Financial
Services Ltd. was set up as wholly owned subsidiary of Canara Bank
in 1987. PNB Capital Services Ltd. was promoted by PNB during
mid-1988 and many more subsidiaries are being set up by other
nationalized banks.
Establishment of SUA
In order to educate and protect the interest of investors, to provide
information about new issues of capital market, to evolve a code of
conduct for underwriters and to render legal and other services to
members and public, the Stockbroker Underwriters Association
(SUA) was established in 1984
23. Continue …
Securities and Exchange Board of India (SEBI)
To develop and regulate securities market, investor protection and to
formulate rules and guidelines for regulation of securities market, the
Central Government constituted Securities and Exchange Board of
India on April 4, 1988.
Re-organization of Private Firms
Private merchant bankers have also started reorganizing their
activities e.g., J.M. Financial & Investment Consultancy Ltd., 20th
Century Finance Corporation Ltd., LKP Merchant Financing Ltd. etc.
Credit Rating Information Services of India Ltd. (CRISIL)
CRISIL has been set up in 1987 to provide help to investors, merchant
bankers, underwriters, brokers, banks and financial institutions etc.
24. SEBI Guidelines
If any company’s other income exceeds 10% of the total
income, the detail should be disclosed.
The minimum application money payable should not be less
than 25% of the issue price.
The company should disclose the time normally taken for the
disposal of various types of investor’s grievances.
At present no organization can act as a ‘merchant banker’
without obtaining a certificate of registration from the SEBI
The company can make firm allotments in public issues as
follows-
• Indian mutual funds (20%)
• FIIS (24%)
• Regular employees of the company (10%)
• Financial institutions (20%)
25. Continue …
Prescribed capital adequacy norms for registration of the various
categories of merchant bankers
Category I: Can act as Issue managers (Rs. 5 crores)
Category II: Can act only as co-managers (Rs.50 lakhs)
Category III: Can act as co-managers but cannot undertake portfolio
management (Rs.20 lakhs)
Category IV: Can merely act as consultant or advisor to issue of capital (Nil)
According to the SEBI (Merchant Bankers) Amendment Regulations, 1999,
w.e.f. 30.9.1999, every merchant banker shall pay a sum of Rs. 5 lakhs as
registration fees at the time of grant of certificate by the Board.
The fee shall be paid by the merchant banker within 15 days of receipt of
intimation from the Board.
26. Government Policy on
Merchant Banking Services
• The Government issued policy guidelines for merchant
bankers to ensure sufficient physical infrastructure,
necessary expertise, good financial standing, professional
integrity and fairness in their transactions. The merchant
bankers have to be competent to serve the investors also.
• On 1st March, 1993 new policy guidelines have been
issued by SEBI for the merchant bankers to ensure greater
transparency in their operations and to make them
accountable so as to protect the investor’s interest. The
guidelines relate to pre-issue obligations, underwriting,
advertisements and post-issue obligations of the
merchant bankers has also been public.
27. FUTURE OF MERCHANT BANKING
Time and again the merchant banking industry in India
witnessed, experienced and underwent significant changes.
The very purpose for which these firms are commencing there
services should be taken care of
They should mould their policy decision and activities to move
in tune with the main objective of investors’ protection and to
create healthy environment in capital markets.
No doubt, merchant banking are subject to a host of control
measures, regulations and rules framed and guided SEBI.
As the liberalization policy continues and the financial market is
expanding rapidly, the future for the country’s merchant
bankers seems to be buoyant. But their roles are changing with
the change in the needs of the customers.
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