This presentation covers Merchant Banking History; Categories; Services provided by them; Methods of placement; underwriting; Issue management & SEBI guidelines.

1. Merchant Banking in India
ABHIJEET DESHMUKH
WWW.ABHIJEETDESHMUKH.COM

2. Introduction
 Merchant bank is a financial institution that primarily deals with
commercial banking needs of international finance, long term loan for
companies provides consulting services and underwriting of stock.
 It also acts as an intermediary between the issuers and the ultimate
purchasers of the securities in the primary market.
 It has been statutory brought with in the framework of the Securities
and Exchange Board of India (SEBI)
Definition
 “Any person who is engaged in the business of issue management
either by making arrangements regarding selling, buying or subscribing
to securities as manager consultant, advisor or rendering corporate
advisory services in relation to such issue management.”

3. History
 Merchant banking started in Italy in late medieval times (from the
fifth to the fifteenth century)
 Reached in France during the seventeenth century
 Italian merchant bankers introduces merchant banking into England
in eighteenth century
 European bankers developed Merchant banking in USA
 In 1972, merchant banking started in South Africa.
History in India
 Foreign bank National Grindlays Bank started merchant banking in
1967
 Then Citibank in 1970 and State Bank of India in 1972 started
Merchant banking
 Later ICICI setup its merchant banking division followed by Bank of
India, Bank of Baroda etc..

4. Merchant bankers categories
• Issue
Management
• Advisor
• Consultant
• Manager
• Underwriter
• Portfolio
manager
• Advisor
• Consultant
• Co manager
• Underwriter
• Portfolio
Manager
• Advisor
• Consultant
• Underwriter
• Advisor
• Consultant
Category - 1 Category - 2 Category - 3 Category - 4

5. Capital Adequacy Norms
A merchant bank will be registered by SEBI in different categories on
the basis of capital adequacy norms in terms of its “Net worth”.
Category Minimum amount
Category 1 5,00,00,000
Category 2 50,00,000
Category 3 20,00,000
Category 4 NIL

6. Registration with SEBI
Application
for grant
certificate
Information
furnishing,
clarification
and personal
Application
consideration
Granting the
certificate
Payment of
Registration
fees

7. Registration Fee
 A ‘MB’ has to pay a fee at the time of original registration
 Category I Rs. 10 Lakhs
 Category II Rs. 5 Lakhs
 Category III Rs. 1 Lakh
 Category IV Rs. 5,000
 The certificate of registration granted under regulations shall be
valid for a period of three years from the date of its issue to the
applicant.
 The certificate of renewal granted under regulation 9, shall be valid
for a period of three years from the date of its issue to the
applicant.

8. Services provided by
Merchant Bank
 Project counselling
 Loan syndication
 Managers to issue
 Underwriting
 Portfolio Management
 Advising on mergers and takeovers
 Offshore finance

9. Methods of Placements
 Underwriting is insurance for the new securities of the public. It is
one of the methods of marketing securities.
 The other methods are: Prospectus method, where the capital is
raised by this method is very prevalent in India. The distribution
expenses may be substantially saved.
 Offer for sale, where the sales are sold largely to the brokers/issue
houses. The issue house/brokers again sell the shares to the public at
a fixed price. This method saves the company the cost and the
trouble of selling the shares to the public. Here a Third party takes
over the responsibility.
 Private placement, where the funds are raised in the primary market
by selling the security issue to one investor or a small group of
investors without resorting to underwriting. The cost of the issue is
minimal. It is the most effective way of procuring the long term
funds. There is no need to follow the statutory formalities. The offer
is made to select a group of known persons.

10. Underwriting
 Underwriting is a guarantee given by the underwriters to take up
whole or part of the issue of securities at a given price not subscribed
by the public for a commission.
 The agreement between the issuing company and the financial
intermediary, called the underwriter, where by sale of certain
quantum of securities is guaranteed for the issuing company, is
known as underwriting agreement.
 It facilitates the provision of money during the financial crisis of the
company an alternative to Bank Borrowings.
 The Underwriter helps the new company in its reorganization /
recognition.
 To act as an Underwriter, a certificate of Registration must be
obtained from SEBI, after payment of prescribed fee to SEBI.
 Underwriters are appointed by the issuing companies in consultation
with the Lead Manager or Merchant Banker to the issue and many a
time both Merchant Banker and Underwriter are the same entity.

11. Issue Management – Flow Chart
 Corporates approach Merchant Banker with Amount they wish to raise
 They discuss Business Plan/Project Feasibility/Collateral offered.
 Merchant Bankers appraise Issuer with current market trends / rates /
appetite / psychology of investor, market and competition.
 Merchant Banker prepares a Action Plan including Financial plan
comprising cost of raising and other expenses, Regulator compliance
plan, Procedural Appointment of Intermediary/Underwriter/distributor
and most important the Price of the Issue.
 Prepares the prospectus and submit with SEBI and takes care of all
regulatory requirements
 Based on type of placements, appoints underwriter
 Involved in Security listing, ISIN creation by appoint Registrar and
Transfer agent, Depository (NSDL/CDSL)
 Provide the Amount to Issuer and get the fees/ Underwriting commission

12. Underwriting Agreements
Depending on the type of commitment required by the issuing
company, several kinds of underwriting agreements are formed, each
with its own level of risk:
 Firm Commitment:
Firm commitment is the most commonly used type of
underwriting contract. The underwriter agrees to buy securities
from the issuing corporation and pay the proceeds to the
company. Any losses that occur due to unsold shares are prorated
amongst the participating underwriting firms according to their
proportional participation.
 Best Efforts:
Best efforts underwriting allows the firm (or underwriting
syndicate) to act as agent for the issuing corporation and limits the
responsibility of that firm to the shares it is able to sell. All unsold
shares are absorbed by the issuer

13. Agreement of Underwriting
 All or None:
All or none underwriting allows the issuing corporation to contract
for the sale of all shares. If any shares remain at the end of the
underwriting process, the underwriting is cancelled. Underwriters
cannot deceive investors by stating that all of the securities in the
underwriting have been sold if it is not true.
 Standby:
Stand by underwriting allows an underwriting firm (or syndicate)
to wait in the wings in an additional offering for any unused pre-
emptive rights that are not executed by the company’s current
shareholders. The underwriter will purchase the unused rights,
exercise them and sell the shares.

14. Underwriting Commission
 Underwriting commission is payable on the basis by the issuer
corporation on the basis of commission rates prescribed by SEBI
a) Equity shares 2.5% 2.5%
b) Preference,
Convertible and non
convertible
debentures
Up to Rs 5L 2.5% 1.5%
Exceeding Rs 5L 2% 1%
On amounts in
developing the
underwriter
On amounts
Subscribed by the
public

15. SEBI Guidelines
According to the SEBI guidelines the following factors are to be fulfilled:
 The minimum requirement of 90% subscription is mandatory for each
issue of capital to the public. This clause is applicable for both public
and rights issue.
 If the company is not able to receive the issued amount from the
public subscription and accepted development from the underwriters,
then the company refunds the amount.
 In order to standardize the legal relationship between the issuing
company and the underwriters, the SEBI has formulated the model
underwriting agreement. The underwriting agreement should be filed
with the stock exchanges.
 The registration number of the underwriter is to be quoted in all
correspondence with the SEBI, government authorities and clients.
 The total underwriting obligations under all the agreements should
not exceed twenty times the network of the underwriter
·.

16. Thank You