Merchant Banking

MERCHANT BANK

Bachelor of Commerce (Banking & Insurance)

SEMESTER-V

Submitted in Partial Fulfillment of the requirement for the award of the Degree of Bachelor of Commerce (Banking & Insurance)

By BHARATI .N. SAH

PROJECT GUIDE MR. NAVIN SARAF

SHREE SHANKAR NARAYAN EDUCATION TRUSTS SHANKAR NARAYAN COLLEGE OF ARTS, COMMERCE-BMS, BSCIT, BBI, BAF

Merchant Banking

Shree Shankar Narayan Education Trusts SHANKAR NARAYAN COLLEGE OF ARTS, COMMERCE. B.M.S., B.Sc.IT. , B.Com. (Banking & Insurance) & B.Com. (Accounting & Finance)

ACKNOWLEDGEMENT

We would like to thank MR. VIVEKwho provided us invaluable advice & guidance for the MERCHANT BANK. We would also like thank to all them who helps me for completing the project work.

Special thank to the librarian of our college for helping us in finding out the relevant reference material for our project.

We would like to thanks our parents, family members & all our college friendswho gave us all the support and always came forward whenever helping hand was needed.

Once again, we thanking all to them who directly & indirectly help us for completing this project.

Merchant Banking

Merchant Banking

EXECUTIVESUMMARY
Although merchant banking activity was ushered in two decades ago, it was only in 1992 after the formation of Securities and Exchange Board of India that it is defined and a set of rules and regulations in place. Today a merchant banker is who has the ability to merchandise that is, create or expand a need and fulfill capital requirements.

I have given an overview about the financial markets and the role of merchant bankers in the growth of these markets. My project covers how the merchant banks works, rules & regulations laid by SEBI & its impact on the merchant banking activities. Their importance in the economy is expected to grow even further in the coming years with an increasing proportion of household savings getting invested in corporate & other securities. Hence, my project covers the challenges and advantages, which India will get and is getting by merchant banking activities. I have covered several services provided by Merchant Bankers & the role of Merchant bankers in providing those services to the business world. Finally, the top players, which exist in merchant banking, are also covered; their services are also been focused. To get the practical knowledge about merchant banking activities I have interviewed visited State bank of India, Kotakmahindra bank and SPA Merchant bankers ltd.

Merchant Banking

EVOLUTION OF BANKING
The banking system in India is based upon the British Banking System which is largely branch banking. Commercial Banks in India were started during the latter half of the 19th century. Three Presidency Banks dominated the banking sector i.e. BANK OF BENGAL, BANK OF BOMBAY, and BANK OF MADRAS. These banks were setup by a special charter of the British Government.

The above three banks were later amalgamated to form one bank called, the IMPERIAL BANK OF INDIA under the Imperial Bank of India Act, 1920. The Imperial Bank carried on the business of commercial banking as well as managed the public debt office of the Central and the State Government. The government continued to handle the issuance of currency notes and coins until Reserve Bank of India was set up in 1935.

The second half of the 19th century saw the establishment of a number of privatesector banks such as Bank of Baroda, Allahabad Bank, and Punjab National Bank. At that time there was an indiscriminate growth of smaller banks in the private sector. These banks were set up by merchants and traders who combined trading with banking. The progress of any economy mainly depends on the efficient financial system of the country. Indian economy is no exception financial system of the country. The importance of the financial sector reforms affirms an effective means for solving the problems of economic, financial and social in India and elsewhere in the developing nations of the world.
5

Merchant Banking

DEFINITION OF BANKING
The Oxford Dictionary defines bank as an establishment for the custody of money, which it pays out on a customers order Banking Company of India has been defined in the Banking Companies Act,1949 as, one which transacts the business of banking which means the accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdraw by cheque, draft, order or otherwise

WHAT IS MERCHANT BANKING?

The term merchant banking is used differently in different countries and so there is no precise definition for it. In London, merchant banker refers to those who are members of British Merchant Banking and Securities House Association who carry on consultation, leasing, portfolio services, assets management, Euro credit, loan syndication etc. In America, merchant banking is concerned with mobilizing savings of people and directing the funds to business enterprise.

The poet war period witnessed the rapid growth of merchant banking through the innovative instrument like Euro dollar and the growth of various financial centers like Singapore, Hong Kong, Bahrain, Kuwait, Dubai etc.

Merchant Banking

MERCHANT BANKING IN INDIA

In India prior to the enactment of Indian Companies Act, 1956, managing agents acted as issue houses for securities, evaluated project reports, planned capital structure and to some extent provided venture capital for new firms. Few share broking firms also functioned as merchant bankers.

The need for specialized merchant banking service was felt in India with the rapid growth in the number and size of the issues made in the primary market. The merchant banking services were started by foreign banks, namely the National Grindlays Bank in 1967 and the City Bank in 1970. The Banking Commission in its report in 1972 recommended the setting up of merchant banking institutions. This marked the beginning of specialized merchant banking in India.

To begin with, merchant banking services were offered along with other traditional banking services. In the mid-eighties, the Banking Regulation Act was amended permitting commercial banks to offer a wide range of financial services through the subsidiary rule. The State Bank of India was the first Indian Bank to set-up Merchant Banking Division followed by Bank of India, Bank of Baroda, Canara bank, Punjab National Bank and UCO Bank. The merchant banking gained prominence during 1983-84 due to new issue boom.

Merchant Banking

NEED & IMPORTANCE IN INDIA

Important reason for the growth of merchant banking is due to exerting excess demand on the sources of funds forever expanding industry and trade. Corporate sector had the only alternative to avail of the capital market services for meeting their long-term financial requirements through capital issues of equity and debentures Merchant banks can play highly significant role in mobilizing funds of savers to investible channels assuring promising return on investments activity. With the growth of merchant banking profession corporate enterprises in both public and private, sectors would be able to meet the growing requirements for the funds for establishing new enterprises, undertaking

expansion/modernization/diversification of the existing enterprises. Merchant banks have been procuring impressive support from capital market for the corporate sector for financing their projects. Merchant bankers advise the investors of the incentives available in the form of tax reliefs, other statutory relaxations, good return on investment and capital appreciation in such investment to motivate them to invest their savings in securities. Thus, the merchant bankers help industry and trade to raise funds, and the investors to invest their saved money in sound and healthy concerns with confidence, safety and organizations for higher yields.

Merchant Banking

ROLE OF MERCHANT BANKERS

The role of merchant banker is dynamic in the wake of diverse nature of merchant banking services. Merchant bankers dynamism lies in promptly attending to the corporate problems and suggests ways and means to solve it. The nature of merchant banking services is development oriented and promotional to help the industry and trade to grow and survive. Merchant banker is, therefore, dedicated to achieve this objective through his dynamism. He is always awake to renew his skills, develop expertise in new areas so as to equip himself with the knowledge and techniques to deal with emerging new problems of corporate business world. He has to keep pace with the changing environment where Government rules, regulations and policies affecting business conditions frequently change; where science and technology create new innovations in production processes of industries envisaging immediate renovations, diversification, modernizations or replacements of existing plant and machinery or other equipments putting new demands for finances and necessitating overhauling of the capital structure of the firms.

Merchant banker has to think and devise new instruments of financing industrial projects. He has to assume wider responsibilities of saving industrial units from going sick and guiding industries to be set up industrially backward areas to eliminate regional imbalances in industrial development of the country. He has to guide the wider section of the community possessing surplus money to invest in corporate securities and other productive investment channels. He has to help the industry in different forms to ensure that it runs risk free and devoid of uncertainty by assisting the has to watch the interest and win over the confidence of the Government, its agencies, along with the entrepreneurs, the investors and the
9

Merchant Banking

whole community. He must bridge the communication gap between different sections and resolve the problem being faced in different areas concerned with the business world.

To discharge the above role, a merchant banker has t be dynamic. For this reason, a merchant banker is sometimes, called M.B i.e. Moving Bottom, i.e., one who never sits at one place, always moving- attending meetings and meeting clients and constituents, doing business and getting business by attending meetings and conferences, imparting knowledge to others and acquiring new knowledge to maintain his supremacy in possession of latest information. His role depicts a personality cult, which is unique and envious to be followed by others.

ROLE IN THE MARKET

The Securities and Exchange Board of India (SEBI) has stated that merchant bankers must be involved more closely in the market making process as share brokers do not have the requisite expertise to evaluate the fundamentals of the scrips before taking over the role of market makers. Further, share brokers generally being partnership; firms do not have the financial clout which is necessary for market making activity. Resultantly, the SEBI has suggested that any member of the stock exchange along with one merchant banker registered with SEBI could act as a market maker. The SEBI has felt that to ensure liquidity of scrip it was necessary to facilitate greater movement, which could only be achieved through the institution of market makers. Market makers would also create a market for the scrips by offering two way quotes to the investors. A minimum of ten scrips has been proposed by SEBI for the market makers.
10

Merchant Banking

CLASSIFICATION OF MERCHANT BANKER Category I Merchant Banker:

The capital adequacy requirement for category I, merchant banker is that the net worth should not be less than Rs.1 crore. The banker would be allowed for: Carry on any activity of the issue management which will inter-alia consist of preparation of prospectus and other information relating to the issue, determining financial structure tie-up of financiers and final allotment and refund of subscription and act as Advisor, Consultant, Manager, underwriter or portfolio manager.

CATEGORY II MERCHANT BANKER:

The minimum capital adequacy requirement for category II Merchant Banker is a net worth of Rs.50 lakhs. This Merchant Banker is allowed to act only as adviser, consultant, co-manager, underwriter and portfolio Manager.

CATEGORY III- MERCHANT BANKER:

The category III, Merchant Banker should have a minimum network of Rs.20 lakhs to meet the capital adequacy requirements. The possible activities are to act as underwriter, adviser and consultant to an issue.

11

Merchant Banking

CATEGORY IV- MERCHANT BANKER:

There is no capital adequacy requirement specified for category IV, Merchant Banker is only allowed to act as adviser or consultant to an issue.

MERCHANT BANKERS COMMISSION

As determined by the Finance Ministry, Government of India, Merchant Bankers are eligible to charge commission / fee from their clients as detailed below : (i) A Merchant Banker can charge 0.5% as the maximum as commission for whole of the issue. (ii) They can charge project appraisal fees. (iii) A lead manager can claim a commission of 0.5% up to Rs.25 crore and 0.2% in excess of Rs.25 crore. (iv) Underwriting Commission. (v) On amount Type of Security On amount by Devolving on subscribed underwriters public 1.Equity shares 2.Preference share/debentures (a) UptoRs. 5 lakh (b) Excess of Rs. 5 lakh 2.50 2.00 1.50 1.00 2.50 2.50

12

Merchant Banking

SERVICES PROVIDED BY MERCHANT BANKERS

The financial institution in India could not meet the demand for long-term funds required by the ever expanding industry and trade. The corporate sector enterprises, therefore, meet their requirements through issue of shares and debentures in the capital market. To raise money from capital market, promoters bank upon merchant bankers who manage the whole show by rendering multifarious services. The merchant bankers also advise the investors of the incentives available in the form of tax reliefs and other statutory obligations.

Merchant banking being service-oriented industry renders the same services in India as Merchant banks in UK and other European countries. In U.S., investment bankers cater to the needs of business enterprises carrying out merchant banking functions. Merchant banks in India carry out the following functions and services: Corporate Counseling Project Counseling Capital Restructuring Credit Syndication Issue Management and Underwriting of public Issue Public Issue Through Prospectus Marketing Pricing Issue Managers, Consultants or Advisers to the Issue Portfolio Management Advisory Service Relating to Mergers and Takeovers Foreign Currency Financing(Off Shore Finance )
13

Merchant Banking

Non Resident Investment Working Capital Finance Acceptance Credit and Bill Discounting Venture Capital Lease Financing Mutual Funds Relief To Sick Industries

CORPORATE COUNSELING
Corporate Counseling refers to set of activities that is undertaken to ensure efficient running of a corporate enterprise at its maximum potential through effective management of finance.

It aims at rejuvenating old-line companies and ailing units, and guiding existing units in locating areas of growth and diversification. A merchant Banker as managerial economists guides the client on aspects of organizational goals locational factors, organization size and operational scale, choice of product and market survey, forecasting for a product cost reduction and cost analysis allocation of resources investment decisions capital management and expenditure control pricing methods and marketing strategy, etc. As a financial and investment expert a merchant banker guides corporate clients in areas covering financial reporting, project measurement, working capital management, financial requirements and sources of finance, evaluating financial alternatives, rate of return and cost of capital, besides providing basic corporate services such as financial rearrangement,
14

Merchant Banking

reorganization, mergers and acquisitions, etc.

The scope of corporate counseling is limited to giving suggestions and opinions to the client and help taking actions to solve their problems. It is provided to a corporate unit with a view to ensure better performance, maintain steady growth and create better image among investors.

Guidance Project formation O B J E C T I V E S Raising Working Capital

Implementation

Modernization

Diversification Mobilising Resources

Following are the activities which from part of corporate counseling. 1. Providing guidance in areas of diversification based on the governments and licensing policies.

15

Merchant Banking

2. Undertaking appraisal of product lines, analyzing their growth and profitability and forecasting future trends.

3. Rejuvenating old-line companies and ailing sick units by appraising their technology and process, assessing their requirements and restructuring their capital base.

4. Commissioning of diagnostics studies.

5. Assessment of revival prospects and planning for rehabilitation through modernization and diversification and revamping of the financial and organizational structure.

6. Arranging for the approval of the financial institutions/ banks for schemes of rehabilitation involving financial reliefs, etc.

7. Providing assistance in getting soft loans from financial institutions for capital expenditure, and the requisite credit facilities from the bank.

8. Monitoring rehabilitations schemes.

9. Exploring possibilities for takeover of sick units and providing assistance in making consequential arrangements and negotiations with financial institutions/ banks and other interest/ authorities involved.

16

Merchant Banking

PROJECT COUNSELING
Project counseling includes preparation of project reports, deciding upon the financing pattern to finance the cost of the project and appraising project report with the financial institutions or banks. Project reports are prepared to obtain government approval, get financial assistance from institutions and plan for the public issue.

The financing mix is to be decided keeping in view the rules, regulations and norms prescribed by the government or followed by financial institutions. The projects are appraised, as to the location, technical, commercial and financial viability of the project. Project counseling also includes filling up of application forms with relevant information for obtaining funds from financial institutions.

Following are the activities forming part of the project counseling:-

1) Undertaking the general review of the project ideas / project profile. 2) Providing advice on procedural aspects of project implementation. 3) Conducting review of technical feasibility of the project on the basis of the report prepared by own experts or by outside consultants. 4) Assisting in the selection of a technical consultancy organization for preparing project reports and market surveys, or review of the project reports or market survey reports prepared by TCO. 5) Assisting in the preparation of project report from a financial angle, and advising and acting on various procedural steps including obtaining government consents for implementation of the project.

17

Merchant Banking

6) Assisting in obtaining approvals / licenses / permissions / grants, etc from government agencies in the form of letter of intent, industrial license, DGTD registration, and government approval for foreign collaboration. 7) Providing guidance to Indian entrepreneurs for making investment in Indian projects in India and in Indian joint ventures overseas. 8) Identifying of potential investment avenues. 9) Carrying out precise capital structuring and shaping the pattern of financing. 10) Arranging and negotiating foreign collaboration, amalgamations, mergers, and takeovers. 11) Undertaking financial study of the project and preparation of viability reports to advice on framework of institutional guidelines and laws governing corporate finance. 12) Providing assistance in the preparation of project profiles and feasibility studies based on preliminary project ideas, covering the technical, financial and economic aspects of the project from the point of view of their acceptance by financial institutions, and banks. 13) Advising and assisting clients in preparing applications for financial assistance to various national financial institutions, state level institutions, banks, etc 14) Assisting clients in making applications for obtaining letters of intent, industrial license, DGTD registrations, etc. 15) Providing assistance in seeking approvals from the Government of India for foreign technical and financial collaboration agreements, guidance on investment opportunities for entrepreneurs coming to India.

18

Merchant Banking

Project counseling Example

Offshore model of projects execution is here to stay and more and more projects are being staffed by offshore consultants as well as the development of work products. Most of this work is done in India through a companys India operations. Here are some guidelines that encompass generic as well as India-specific pointers that can help while managing the offshore efforts in India and elsewhere.

1. Know the partner

The resources are half the globe away in a different culture and time zone with completely different set of priorities. What is important or even imperative to us may not be so to a person so far detached. Therefore its critical to introduce everyone as a person detailing his/her strengths and capabilities. This provides the human touch and a persona rather than dealing with a name and a voice.

2. Role Clarity
Things are not clear for two people working in the same room unless clear distinction between responsibilities is made. Detail out expectations and roles of EVERYONE down to the last resource in detail. For most part people on both sides have not seen each others face or known each other personally so nothing should be assumed!

3. Communication
Nothing is more important than regular and sustained communication. It can help to have a Weekly conference call between different groups at the start of the week and a complete Project status conference call at the end of the week to check
19

Merchant Banking

status. People need to vent out their feelings and exchange their minds - let them! Indians, and most Asians, are in general non-confrontational so being extra patient and sensitive with the offshore resources while eliciting views. More than normal communication helps catch potential problems early on. Encourage the team members to create their detailed profile in the Project Portal (if you have one) along with their pictures. It helps to personalize the name people deal with. Use an IM (maybe Skype?) as the most preferred communication on real time basis - it can be fast and real-time.

4.Onshore Team Buddy/Coach

The Offshore people coming on the project onshore for learning/rotation need guidance on various issues like team policies, communication expectations, work expectations on a US project etc. It really helps a new person to interact and discuss her/his doubts and issues. Something that may not be an issue with an onshore US resource may be a source for depression for an offshore person coming to US for the first time.

5. Detailed Tracking
Prepare three or four different metric charts, for example, on number of test cases, defects opened, rework efforts, number of rebuilds, frequency of defect arrival, duration of resolution, composite effort logged during the week, etc. Make sure people fill the metrics and circulate to all stake-holders. People need to appreciate each others work and know the faulting metrics.

6. Detailed Planning
Provide cushion in schedules and committed dates. There is always some
20

Merchant Banking

unexpected/urgent activity which will hurt the on-going task. We are talking about a different nation here where a lot of things may happen differently. The vacation and holiday schedules for the offshore members should be obtained well in advance and built in into the work plan. Make sure that the combined team schedule is known to everyone and posted on a common drive/access area. Have your build schedule ready for the month in advance. This will help developers plan in advance what code they want to check in. No last minute rush or hitch.

7. Transition Planning
Plan your transition very meticulously; viz. skills, machines, docs etc. Many people are not given opportunity to learn what they are expected to do. The outgoing people dont like to spend any effort on hand-over, as they have no more stakes left in the project. Make sure that people who have made sacrifices of leaving their families and come on a project in a different culture - most of them for the first time - feel appreciated for the work that was accomplished. Any mistakes or underperformance should be communicated when it happens and in person. Asian cultures avoid being reprimanding/informing about mistakes in public.

8. Its a Partnership
Normally, the onshore people tend to take a view that since they are facing the customer so they should decide what is good for project. Do not let onshore people dominate or boss the off-shore team. If off-shore team looses motivation or interest, the whole thing falls flat. As it is, off-shore team is working on limitations
21

Merchant Banking

of not seeing the client, give them as much light as possible on how things are here. Do not hide things from them. Let them feel a part of marketing team too. Do not treat them as back office boys. Bring them in front line as equal partners.

9. Rotation
Have a rotation of people between off-shore and on-site team. They will appreciate each other. The bottomline, therefore, is prepare and plan well and be tuned into the cultural differences to use the strengths of the synergies!!

CAPITAL RESTRUCTURING
Activities that are carried out to assist projects in achieving their maximum potential through effective capital structuring and to suggest various strategies to widen and restructure the capital base, diversify operations and implement schemes for amalgamations, merger or change in business status are collectively known as Capital Restructuring Services.

Under the gamut of capital restructuring services merchant bankers provide advice to companies governed by FERA on disinvestments to their maximum advantage and restructuring the capital for ailing or sick units. Capital restructuring is undertaken by analyzing the capital structure ratios and the debt service coverage, with overall impact on fund-generating capacity of the client corporate unit.

22

Merchant Banking

FOLLOWING ARE THE SERVICES COVERED.

1. Examining the capital structure of the client company to determine the extent of capitalization required.

2. Preparing a comprehensive memorandum for the controller of capital issues and securing consent where the capitalization takes place through issue of bonus shares.

3. Suggesting an alternative capital structure confirming to legal requirements, viz. extent of capitalization of reiseve and quantum of disinvestments by offer for sale and fresh issues of corporate securities such as equity share, and preference share in the case of FERA companies.

4. Preparing a memorandum covering valuation of shares and justifying the level of premium applied for.

5. Critically examining tax implications where the proposal involves offer for sale.

6. Suggesting the ideal capital restructuring for sick units and advising the client companies on the extent and means of bringing fresh capital into business.

7. Capital restructuring may cover mergers, takeovers and amalgamations, involving modernization or diversification of the existing production system and the units.

23

Merchant Banking

CREDIT SYNDICATION
Activities connected with credit procurement and project financing, aimed at raising Indian and foreign currency loans from banks and financial institutions, are collectively known as credit syndication.

Activities covered under credit syndication are as follows.

1. Estimating the total cost of project to be undertaken.

2. Drawing up a financing plan for the total project cost which conforms to the requirements of the promoters and their collaborators, financial institutions and banks, government agencies and underwriters.

3. Preparing loan application for financial assistance from term lenders/ financial institutions/ banks and monitoring their progress including pre-sanction negotiations.

4. Selecting institutions and banks for participation in financing.

5. Follow-up of term loan application with the financial institutions and banks and obtaining the approval for their respective share pf participation.

6. Arranging bridge finance.

7. Assisting in completion of formalities for drawing of term finance sanctioned by institutions by expediting legal documentation formalities, drawing agreements
24

Merchant Banking

etc prescribed by the participating financial institutions and banks.

Example of Credit Syndication

While CSN is banking on loans from a syndicate including Goldman Sachs, Barclays Capital, and BNP Paribas for acquiring Corus, Tata Steel has planned to finance its takeover deal through debt from a consortium of bankers led by ABN Ambro Bank, Deutsche Bank and Bank of America without disturbing its ongoing expansion projects either in India or overseas Mumbai, March 29 RELIANCE Industries Ltd has concluded a loan syndication of $250 million (Rs 1,125 crore). The transaction is the first major syndication since Moody's upgraded India'sratings to Investment grade. The lead arrangers for the syndication were ANZ Investment Bank, BA Asia Ltd, Credit Lyonnais, DBS Bank Ltd, Hong Kong and Shanghai Banking Corporation Ltd and Mizuho Financial Group, a news release said. The deal was sub-written by three banks - Arab Investment Company S. A. A., Bank of Tokyo Mitsubishi Ltd and NORD/LB NordeutscheLandesbankGirozentrale, Singapore Bras risks of lending increase due to rising interest rates, banks are also looking at loan syndication as an important contributor to their fee income.

25

Merchant Banking

ISSUE MANAGEMENT AND UNDERWRITING

Public limited companies can raise capital by issue of shares and debentures from the public. For this purpose they have to complete a certain procedure, which is laid down in the Companies Act, 1956 as well as Securities and

Exchange Board of India. The public issue of shares or debentures can be managed by category I Merchant Bankers and constitute the most important aspect of their services. The public issue of companies involves marketing of issues.

Various agencies are involved such as brokers, underwriters, bankers, advertising agencies, printers, auditors, legal advisors, Registrars to the issue and merchant bankers each providing specialized services to make the issue successful. However, merchant banker is an apex agency who has to plan, coordinate and control the entire issue to the successful marketing of securities. The procedure for managing a public issue by merchant banker is divided into two phases as follows.

Pre-issue management:
The various steps required to be undertaken to manage pre-issue activities are as follows. a) Obtaining stock exchange approvals to the Memorandum of Association and Articles of Association.

b) Taking action as per SEBI guidelines.

c) Finalizing the appointment of the following agencies to compete the public

26

Merchant Banking

issue. d) Advise to company to appoint auditors and legal advisors. e) Drafting the prospectus from the companys legal advisor, underwriting financial institutions and bank.

f) Obtaining consents from all parties and agencies acting for the issue to be enclosed with the prospectus.

g) Approval of prospectus by Board of Directors in the meeting and signing the same by all directors or power of attorney on behalf of any absentee directors.

h) Approval of prospectus from SEBI.

i) Making an application with the stock exchange for listing of shares.

j) Publicity of issue through advertisement and press conferences.

k) To open subscription for the issue.

27

Merchant Banking

Post issue management:The various steps to be taken in the post issue management are as follows.

a) To ensure that the issue is subscribed to the extent of 90% including evolvement from underwriters in case of under-subscription.

b) To supervise and coordinate the allotment procedure of Registrar to the issue as per the prescribed stock exchange guidelines.

c) To ensure that the refund orders, allotment letters are issued within prescribed time limit.

d) To report periodically to SEBI about the progress in the matters related to allotment and refunds.

e) To ensure the listing of securities on the stock exchange.

f) To attend the investor grievances regarding the public issue.

28

Merchant Banking

MARKETING

After dispatch of prospectus to SEBI, the merchant bankers arrange a meeting with company representatives and advertising agents to finalise arrangements relating to date of opening and closing of issue, registration of prospectus, launching, publicity campaign and fixing date of board meeting to approve and sign prospectus and pass the necessary resolutions.

Publicity campaign covers the preparation of all publicity material and brochures, prospectus, announcement, advertisement in the press, radio, TV, investors conference etc. The merchant bankers help choosing the media, determining the size and publications in which the advertisement should appear.

The Merchant Bankers role is limited to deciding the number of copies to be printed, checking accuracy of statements made and ensure that the size of the application form and prospectus conform to the standard prescribed by the stock exchange.

29

Merchant Banking

PRICING OF ISSUES

The SEBI guidelines 1992 for capital issues have opened the capital market to free pricing of issues. Pricing of issues is done by companies themselves in consultation with the merchant bankers. Pricing of issue is part of the pre issue management.

An existing listed company and a new company set up by an existing company with five year track record and existing private closely held company and existing unlisted company going in for public issues for the first time with two and half years track record of constant profitability can freely price the issue. The premium has to be decided after taking into account net asset value, profit earning capacity and market price. Justification of price has to be stated and included in the prospectus.

30

Merchant Banking

MANAGERS, CONSULTANTS OR ADVISERS TO THE ISSUE

The managers to the issue assist in the drafting of prospectus, application of forms and completion of formalities under the Companies Act, appointment of Registrar for dealing with share applications and transfer and listing of shares of the company on the stock exchange. Companies are free to appoint one or more agencies as managers to the issue. SEBI guidelines insist that all issues should be managed by atleast one authorised merchant banker. Ordinarily, not more than two merchant bankers should be associated as lead managers, advisers and consultants to a public issue. In issues of over Rs. 100 crores, upto a maximum of four merchant bankers could be associated as managers.

PORTFOLIO MANAGEMENT
Making decisions relating to the investment of the cash resources of a corporate enterprise in marketable securities by deciding quantum, timing and the type of security to be bought is known as portfolio management. It involves making the right choice of investment aimed at obtaining an optimum investment mix taking into account factors such as the objectives of the investment, tax bracket of the investor need for maximizing yield and capital appreciation, etc.

Portfolio refers to investment in different kinds of securities such as shares, debentures or bonds issued by different companies and securities issued by the government. It is not merely a collection of unrelated assets but a carefully blended asset combination within a unified framework. Portfolio management refers to maintaining proper combination of securities in a manner that they give maximum
31

Merchant Banking

return with minimum risk.

Merchant Bankers provide portfolio management service to their clients. Today the investor is very prudent. Every investor is interested in safety, liquidity and profitability of his investment. But investors cannot study and choose the appropriate securities. They need expert guidance. Merchant bankers have a role to play in this regard. They have to conduct regular market and economics surveys to know, 1) Monetary and fiscal policies of the government. 2) Financial statements of various corporate sectors in which the investments have to be made by the investments. 3) Secondary market position, i.e., how the share market is moving 4) Changing pattern of the industry. 5) The competition faced by the industry with similar type of industries. The merchant bankers have to analyse the surveys and help the prospective investors in choosing the shares. The portfolio managers generally will have to classify the investors based on capacity and risk they can take and arrange appropriate investment. Thus, portfolio management plans successful investment strategies for investors.

The services covered are as follows. Undertaking investments in securities. Undertaking investment for non-resident Indians on both repatriation and non-repatriation basis. Undertaking review of provident fund investment, trust investment etc. Safe custody of securities in India and overseas.
32

Merchant Banking

Collection of return on investment and re-investment of the same in profitable avenues, investment advisory services to the investors and other related services. Providing advice on selection of investments. Carrying out a critical evaluation of investment portfolio. Securing approval from RBI for purchase / sale of securities. Maintaining investment records and complying with ceiling. Collecting and remitting interest and dividend on investment. Providing tax counseling and filing tax returns through tax consultants.

Example of portfolio management

Portfolio Management Services (PMS) is a sophisticated investment vehicle that offers a range of specialised investment strategies to capitalise on opportunities in the market. Deutsche Bank offers its professional services to recommend Portfolio Management Services from seven reputed third party providers (fund houses / financial institutions), who, for a fee, invest your money after scientifically analyzing the pros and cons of the various options.

Portfolio management by SBI

SBI offers an integrated end to end customized asset management solution for institutions by: Understanding the client needs and requirements in terms of risk and returns.

33

Merchant Banking

ADVISORY SERVIC E RELATING TO MERGERS AND TAKEOVERS

A merger is a combination of two or more companies into a single company where one survives and others lose their corporate existence. A takeover is the purchase by one company acquiring controlling interest in the share capital of another existing company. Merchant Bankers are the middleman in selling negotiation between the offeree and offereor. Being a professional expert they are apt to safeguard the interest of the shareholders in both the companies. Once the merger partner is proposed, the merchant banker appraises merger/takeover proposal with respect to financial viability and technical feasibility. He negotiates purchase consideration and mode of payment. He gets approval from the government/ RBI, drafts scheme of amalgamation and obtains approval from financial Institutions.

This is a specialized service provided by merchant banker who arranges for negotiating acquisitions and mergers by offering expert valuation regarding the quantum and the nature of consideration and other related matters.

The various functions that form part of this activity are as follows. 1) Undertaking management audits to identify areas of corporate strength and weakness in order to help formulate guidelines and directions for future growth. 2) Conducting exploratory studies on a global basis to locate overseas markets foreign collaborations and prospective joint venture associates. 3) Examining the pros and cons of proposals and formulating schemes for financial reconstruction, merger and acquisition.
34

Merchant Banking

4) Obtaining approvals from shareholders, depositors, creditors, government, and other authorities. 5) Monitoring the implementation of merger and amalgamation schemes. 6) Identifying organizations with matching characteristics. 7) Assisting in the compliance of legal requirements, obtaining consent from various authorities, etc by coordinating with solicitors, accountants, valuator and other professional experts involved in the task. 8) Advising on capital reorganization of business enterprises.

Merchant bankers provide advice on acquisition propositions after careful examination of all aspects, viz. financial statements, articles of associations, provisions of companies act, rules and guidance of trade chambers the issuing house associations, etc. There are many reasons for recent trend towards mergers and amalgamations, such as Existence of excess unused manufacturing capacity of the purchasing company, which can be utilized efficiently by taking over other units. Lack of manufacturing space with the purchase company. The best solution may be to buy the controlling interest in another company having excessive manufacturing space or capacity. Advantage of economies of scale, viz., bulk buying and joint-selling, particularly the possibility of reduced sales promotion expenses may cause a takeover bid in a horizontal merger of enterprises in a similar trade. Benefit of vertical integration attracts a takeover bid by company which is a supplier to customers who are making large profits, so that the group as whole can reap the benefits.

35

Merchant Banking

Example of Mergers and Acquisition

ICICI securities Limited was amongst the first Indian investment banks to form a dedicated M& A practice and continues to be a leader by providing innovative and unique solutions to achieve varied objectives of the client. Mergers, acquisitions, divestitures, spins-off and leveraged buyouts. Team members bring a wide range of skills from diverse backgrounds, including accounting, industry, law, and management counseling.

36

Merchant Banking

FOREIGN CURRENCY FINANCING (OFF SHORE FINANCE)

The Finance provided to fund foreign trade transactions is called Foreign Currency Finance. The provisions of foreign currency finance take the form of export-import trade finance, euro currency loans, Indian joint ventures abroad and foreign collaborations. The main areas that are covered in this type of merchant activity are as follows. 1) Providing assistance for carrying out the study of turnkey and construction contract projects.

2) Providing assistance in applications to working groups, liaison with RBI, ECGD and other institutions.

3) Arranging for the syndication of various types of guarantees, letters of credit, pre-shipment credit, bridge loans, and other credit facilities.

4) Providing assistance in opening and operating banks accounts abroad. 5) Arranging foreign currency loans under buyers credit scheme for importing goods.

6) Arranging deferred payment guarantees under suppliers credit scheme for importing capital goods.

7) Providing assistance in obtaining export credit facilities from EXIM bank for
37

Merchant Banking

export of capital goods, and arranging for the necessary government approvals and clearance.

8) Undertaking negotiations for deferred payment, export finance, buyers credits, documentary credits, and other foreign exchanges services like packing credit etc.

9) Providing guidance on forward cover for exchange risk.

10)

Assisting in arranging foreign currency guarantees and performance bonds

for exporters.

38

Merchant Banking

NON RESIDENT INVESMENT

The services of merchant bankers include investment advisory services to NRI in terms of identification of investment opportunities, selection of securities, investment management etc. They also take care of the operational details like purchase and sale of securities, securing necessary clearance from RBI for repatriation of interest and dividend.

WORKING CAPITAL FINANCE

The finance require for day to-day expenses of an enterprise is known as Working Capital Finance. Merchant bankers advise on optimal mix of long

term and short term funds. They assist in bill discounting, placement of Commercial Paper, arrange line of credit, place inter corporate deposits. They act as intermediaries. They liaison with raring agencies for rating of CP and ICDs.

Merchant bankers undertake the following activities as part of providing this type finance:1. Assessment of working capital requirements.

2. Preparing the necessary application to negotiations for the sanction of appropriate credit facilities.

3. Providing assistance in negotiations with all banks, and suggesting a sharing pattern of credit limits amongst participating banks where more than one bank is
39

Merchant Banking

involved.

4. Assisting co-coordinating and expediting documentation and other formalities for disbursement.

5. Advising on the issue of debentures for augmenting long-term requirements of working capital.

Example of Working Capital

SBI is a one shop providing financial products / services of a wide range for large, medium and small customers both domestic and international.

Working Capital Financing

Assistance extended both as Fund based and Non-Fund based facilities to Corporate, Partnership firms, Proprietary concerns.

Working Capital finance extended to all segments of industries and services sector such as IT.

Term Loans
To support capital expenditures for setting up new ventures as also for expansion, renovation etc.

Deferred Payment Guarantees

To support purchase of capital equipments.
40

Merchant Banking

Corporate Loans
For a variety of business related purposes to corporates.

Export Credit
To Corporates / Non Corporates

ACCEPTANCE CREDIT AND BILL DISCOUNTING

Activities relating to the acceptance and the discounting of bill of exchange, besides the advancement of loans to business concerns on the strength of such instruments, are collectively known as Acceptance Credit and Bill discounting are an integral part of a developed money market.

In order that the bill accepting and discounting takes place on sound lines it is imperative that the firms involved command a good reputation and financial standing. Further collecting credit information and rating the credit-worthiness of the parties concerned are very much part of this function. In developed money market like London and New york, there are specialized agencies such as discount houses and acceptance houses, that play an active role in promotion of this function. In India, RBI takes special care in developing the bill market.

41

Merchant Banking

VENTURE CAPITAL
A specially designed capital as form of equity financing for funding high-risk and high-reward projects, is known as venture capital. Originated in the USA in the 1950s, when business magnates like Rockefeller financed new technology companies. The concept became more popular during the sixties and seventies, when several private enterprises undertook the financing of high-risk and high reward projects in India. Venture capital companies have largely contributed to the technological and industrial revolution.

A large number of Indian and international companies are engaged in venture capital funding for high technology and high-risk projects. A number of leading national development financial institutions such as IDBI

and ICICI are managed in venture capital financing, and the developed a number of special schemes for this purpose.

Example of Some important Venture Capital Funds in India.

APIDC Venture Capital Limited ,1102, Babukhan Estate, Hyderabad 500001 Canbank Venture Capital Fund Limited, IInd Floor, Kareem Towers, Bangalore Gujarat Venture Capital Fund 1997, Ashram Road, Ahmedabad 380 009. Industrial Venture Capital Limited, Thyagaraya Road, Chennai 600 017. Auto Ancillary Fund Opp. Signals Enclave, New Delhi 110 010 Gujarat Venture Capital Fund 1995 Ashram Road Ahmedabad 380 009 Karnataka Information Technology Venture Capital Fund Cunningham Bangalor.
42

Rd

Merchant Banking

LEASE FINANCING
Merchant banking activity whereby financial facilities are provided to companies that undertake leasing is known as Lease Financing. Leasing involves letting out assets on lease for a particular time period for use by the lessee. Leasing provides an important alternative source of financing capital outlay. Lease financing benefits both the lesser and the lessee.

Following are the important services provided in regard to leasing: Providing advice on the viability of leasing as an alternative source for financing capital investment projects. Providing advice on the choice of a favorable rental structure. Providing assistance in establishing lines of lease for acquiring capital equipment, including preparation of proposals, documentations etc.

Example of Leasing
In India leasing is non-banking financial activity undertaken by leading development financial institutions like ICICI, IDBI, and IFCI. Commercial banks also provides lease financing by forming subsidiaries under the amended Banking Regulation Act of 1949.

43

Merchant Banking

MUTUAL FUNDS
Institutions and agencies that are engaged in the mobilization of the savings of innumerable investors for the purpose of channeling them into productive investments of a wide variety of corporate and other securities are called Mutual Funds. UTI is the first and the largest mutual fund in the country. The mutual funds industry has a large number of players, both in the public as well as the private sector. Commercial banks are also making rapid strides in the realm of mutual funds business. Some of the services rendered by mutual funds are as follows. 1) Mopping up public savings.

2) Investing the funds in a diversified portfolio of shares and debentures belonging to well managed and growing companies. 3) Earning investors a steady return on investments with an assurance of capital appreciation. 4) Engaging in the business of acquisition, holding or disposal of securities. 5) Making investment in any commercial paper floated by the Central Government, RBI any local authority, any foreign Government, foreign bank or any other authority outside India and approved by RBI

Example of Mutual fund ICICI prudential

Prudential ICICI Mutual Fund is the largest private sector mutual fund in India with assets of over Rs.34,119 crore under management as of Aug 2006. The asset management company, Prudential ICICI Asset Management Company Limited, is
44

Merchant Banking

a joint venture between Prudential Plc, Europe's leading insurance company and ICICI Bank, India's premier financial institution.

Prudential Plc holds 55 per cent of the asset management company and the balance by ICICI Bank. In a span of just over six years, Prudential ICICI Asset Management Company has emerged as one of the largest asset management companies in the country.

The Company manages a comprehensive range of schemes to meet the varying investment needs of its investors spread across 68 cities in the country. The management is headed by PankajRazdan, managing director and the fund management team is headed by Nilesh Shah, chief investment officer.

45

Merchant Banking

Relief to sick industries

Merchant bankers extend the following services as part of providing relief to sick industries. 1) Rejuvenating old-lines and ailing units by appraising their technology and process, assessing their requirements and restructuring their capital base. 2) Evolving rehabilitation packages which are acceptable to financial institutions and banks.

3) Exploring the possibilities of mergers/ amalgamations, wherever called for 4) Assisting in obtaining approvals from the Board for Industrial and Financial Reconstruction and other authorities under the Sick Industrial Companies Act, 1985. 5) Monitoring the implementation of rehabilitation schemes mergers and / or amalgamations.

46

Merchant Banking

DISTINGUISH BETWEEN MERCHANT BANKS AND COMMERCIAL BANKS

Merchant Banks and Commercial Banks compare as follows.

Merchant Banks Assist in raising capital in the form of equity, preference shares, syndicated loan and working capital instruments. Advisors-not financers. Do not accept chequable deposits Most of work they get is about management of

Commercial Banks Provide funds in the form of term loan and Working Capital. Financing is the main business.

Demand deposit is the key feature. Commercial banks majority business is of

equity issues in the capacity term lending and bank of lead manger, underwriter, pricing of issue, book running, and liasoning with SEBI. Mainly fees based business. Mainly fund based business.
47

deposits.

Merchant Banking

GROWTH OF MERCHANT BANKING IN INDIA

Formal merchant banking activity in India was originated in 1969 with Merchant Banking Division set up by the Grindlays 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. Other foreign banks like City Bank, Chartered Bank also assumed the merchant banking activity in India. State Bank of India started

merchant banking in 1973 followed by ICICI in 1974. Both these Indian merchant bankers emerged as leaders in merchant banking having done significant business during the period of 1974-1987 in comparison to foreign banks. The early and mid-seventies witnessed a boom in the growth of merchant banking organizations in the country with various commercial banks, financial institutions, and brokers firms entering in to the field of merchant banking. The early growth of merchant banking in the country is assigned to the Foreign Exchange Regulation Act, 1973 (FERA) where under large number of foreign companies operating in India were required to dilute their foreign holdings in order to continue business in the country.

48

Merchant Banking

PROBLEMS AND HURDLES OF MERCHANT BANKERS

1. SEBI guidelines have authorized merchant bankers to undertake issue related activities only with an exception of portfolio management. These guidelines have made the merchant bankers either to restrict their activities or think of separating these activities from the present one and float new subsidiary and enlarge the scope of its activities.

2. SEBI guidelines stipulate a minimum net worth of Rs.1 crore for authorization of merchant bankers. Small but professional and specialized merchant bankers who do not have a net worth of Rs.1 crore may have to close down their business. The entry is denied to young, specialized professionals into merchant banking business.

3. Non co-operation of the issuing companies in timely allotment of securities and refund of application money is another problem of merchant bankers. The guidelines have put the responsibility on the merchant bankers. They have to seek the co-operation of the issuing company to shoulder the responsibility.

49

Merchant Banking

Guidelines For Merchant Bankers As Per SEBI

Merchant Banking in India is governed by Securities and change Board of India (Merchant Bankers) Regulations, 1992. These were amended 3 to 4 times till 2006. Highlights of provisions as valid in 2006 are as follows:-

1. To be a merchant banker person should apply to SEBI in prescribed format.

2. Merchant Banking business includes following activities : to carry on any activity of the issue management, which will inter-alia consist of preparation of prospectus and other information relating to the issue, determining financial structure, tie-up of financiers and final allotment and refund of the subscription. Activities also include an act as adviser, consultant, manager.

3. To act as an underwriter and portfolio manager, separate applications are to be made to SEBI under respective regulations.

4. Applicant has to be a body corporate and should not be an NBFC carrying out activities other than those of merchant bankers as specified above. It should not accept or hold public deposits. At least 2 merchant banking experienced persons should be in employment.

5. Should fulfill capital adequacy criteria as specified by SEBI from time to time.

6. Merchant banker other than a bank or a [ public financial institution] who has
50

Merchant Banking

been granted a certificate of registration under these regulations should not carry on any business other than that in the securities market.

7. Every merchant banker should furnish to the Board half- yearly unaudited financial results when required by the Board with a view to monitor the capital adequacy of the merchant banker.

8. All the issues should be managed by at least one merchant banker functioning as the lead merchant banker.

9. Merchant banker or any of its directors, partner or managed or principal officer should not either on their respect accounts or through their associates or relatives enter into an transaction in securities of bodies corporate on the basis unpublished price sensitive information obtained by the during the course of any professional assignment either from the clients or otherwise.

10.Every merchant banker should appoint a compliance officer who shall be responsible for monitoring the compliance of the Act, rules and regulations, notification, guidelines, instructions etc., issued by the Board or the Central Government and for redressal of investors grievances. The compliance

Officer should immediately and independently report to the Board any noncompliance observed by him.

11.SEBI can suspend / cancel registration of defaulter merchant bankers.

51

Merchant Banking

CURRENT SCENARIO
Merchant banking is an area that we need to build and grow in the years to come. As India forms part of the global village, it becomes increasingly necessary for us to look at this business in a more holistic manner. Obviously, international players with strong domestic partners such as DSP Merrill Lynch, JM Morgan Stanley, Kotak Mahindra Capital, together with experienced organizations like Enam and institutional backed investment bankers such as ICICI Securities, etc., are the ones who have expertise, muscle, and placement power in a greater measure than relatively new entrants. The red hot economy is the obvious starting point. India is likely to end the year with GDP growth in excess of 7 percent. Companies and private equity investors are sitting on large piles of cash. In 2006 deal activity was largely restricted to the IT and Telecom sectors. Thus, while there is a steady flow of deals, there is now a shortage of talent to do the job.

MERCHANT BANKING: INDIAN SCENARIO

Merchant Banking activity was formally initiated into the Indian capital markets when Grindlays Bank received the license from Reserve Bank in 1967. Grindlays which started with management of capital issues, recognized the needs of emerging class of entrepreneurs for diverse financial services ranging from production planning and system design to market research. Apart from meeting specially, the needs of small-scale units it provided management constancy
52

Merchant Banking

services to large and medium sized companies. Following Grindlays Bank, Citi Bank set-up its Merchant Banking division in 1970. The division took up the task of assisting new entrepreneur and existing units in the evaluation of new projects and raising funds through borrowing and issue of equity. Management consultant services were also offered. Consequent to the recommendations of Banking Commission in1972, that Indian bank should start Merchant Banking Division in 1972. In the initial years the SBIs objective was to render corporate advice and assistance to small and medium entrepreneurs

53

Merchant Banking

MERCHANT BANKING: INTERNATIONAL SCENARIO

The Merchant Banking scenario in developed countries like USA and UK are different from Indian Merchant Banking activities. The Merchant banker is also called as Investment Bankers. A brief outline of Merchant Banking in USA and UK has shown in the following paragraphs.

Merchant Banks in UK
In United Kingdom, Merchant Banks came on the scene in the late eighteenth century and early nineteenth century. Industrial revolution made England into a powerful trading nation. Rich merchant houses that made their fortunes in a colonial trade diversified into banking. Their principle activity started with the acceptance of commercial bills pertaining to domestic as well as international trade. The acceptance of the trade bills and their discounting gave rise to acceptance houses, discount houses, and issue houses. Merchant Bankers initially included acceptance houses, discount houses and issue houses. A Merchant

Banker was primarily a merchant rather than his customers entrusted banker but him with funds. Merchant Banks in UK: Finance foreign trade, Issue capital, Manage individual funds, Undertake foreign security business, and Foreign loan business.

54

Merchant Banking

They also used to finance sovereign government through grant of long-term loans. Since the end of Second World War commercial banks in Western Europe have been offering multiple services including Merchant Banking services to their individual and corporate clients. British banks set-up division or subsidiaries to offer their customers Merchant Banking services.

Merchant Banking in USA

Merchant banks make the primary markets in USA, arrange mergers and acquisitions, undertake global, custody, proprietary trading and market making, niche business, fund management and advisory services to governments and firms. The increased regulation and control of domestic operations gave a fillip to large US banks to undertake Merchant Banking functions in international capital markets. The US investments Banks have extended their operations to the

international level. They are largely responsible for the development of the Eurodollar market in the securities and globalization of capital markets. They have a prominent presence in London and other European financial centers. Merchant Banks have today a strong parent, a strong balance sheet and a strong international network to play a global role.

55

Merchant Banking

QUALITIES OF GOOD MERCHANT BANKERS

Merchant bankers are individual experts who organize and manage the merchant banks. The operations of merchant banks are, therefore, influenced by the personality trait of these individuals. For the success of merchant banks operations, the qualities which merchant bankers should have are discussed below:

LEADERSHIP:merchant banker should possess all relevant skills, update

knowledge to interact with the clients and effectively communicate. Leadership is synonymous with followers who follow the one who leads.

AGGRESSIVE ACTION:-aggressiveness is a personality trait of a good

leader but in merchant banking it has a wider connotation. Aggressive merchant bankers are always looking for new business. Once a business opportunity has been located, the merchant banker has got to obtain the mandate for the merchant banking assignment from the clients at once which will depend upon his own communication skills, persuasiveness and the background of the organization to which he belongs. A good merchant banker is one who does not allow his client to think anything outside except what has been advised.

COOPERATION AND FRIENDLINESS:-These two characteristics are

the symbols of good leadership but it hardly needs to be stressed that cooperation and friendliness coupled with persuasiveness are the main instruments with which
56

Merchant Banking

a merchant banker mixes with the people, gathers information, obtains business mandate and renders satisfactory services to the clients. Friendliness and cooperation must flow as natural traits in the merchant banker to win the trust of the clients.

CONTACTS :success of merchant banker depends upon his sociable nature

and the richness of wider contacts. A merchant banker is supposed to be Indian and levels, acquainted deeply with all the constituents of merchant banking. foreign banks, financial institutions at Central and

State

promoters/directors/owners and chief executives of the private and public enterprises which would be prospective beneficiaries of merchant banking services, printers, advertising agencies, brokers and stock exchange dealers, advocates and solicitors and members of the press whose services are availed of in executing merchant banking assignments. Merchant bankers should widen

contacts and references and continue to maintain them with goodness, honour and humour by meeting people.

ATTITUDE TOWARDS PROBLEM SOLVING:The most important

personality trait of a merchant banker is his attitude towards problem solving. Even client coming to him has got to return fully satisfied having consulted a merchant banker. Positive approach to understand the view points of others, their difficulties and their adverse circumstances is possible only when a person is skilled in human
57

Merchant Banking

relations particularly the inter-personal and intra-personal behavior.

Effective

communication and proper feedback are the pre-requisite for creating a positive attitude towards problem solving.

RESPONSIBILITIES OF MERCHANT BANKER To the Investors

Investor protection is fundamental to a healthy growth of the Capital Maerket. Protection is not to be conceived as that of compensating for the losses suffered. The responsibility of the Merchant Banker in ensuring the completeness of the disclosures is of paramount importance in view of the fact that entire reliance is based on offer Document either Prospectus or Letter of Offer because an independent agency like a Merchant Banker has done the scrutiny. Capital structuring The Merchant Bankers while designing the capital structure take into account the various factors such as Leverage effect on earnings per share, the project cost and the gestation period, cash flow ability of the company, the cost of capital, the considerations of management control, size of the company, and general economic factors. These exercise are done mainly in order to meet the fund requirement of the company taking due cognizance of the investors preference.
58

Merchant Banking

Project Evaluation and due Diligence Due diligence and project evaluation is another major responsibility of the Merchant Banker. Where the project has already been appraised by a

bank/financial institution, the Merchant Banker relies on the said appraisal before accepting an assignment. However, where the project has not been appraised by as bank/financial instituion, the Merchant Bank undertakes a detailed evaluation of the project before taking up an assignment for issue management.

Legal aspect
The factors that are looked into in case of the legal aspects are: Compliance with the SEBI guidelinesand the various guidelines issued by the Ministry of Finance and Department of CompanyAffairs. Pending litigations towards tax liabilities or any criminal/civil prosecution any of the directors for any offenses. Fair and adequate disclosures in the prospectus.

Pricing of the Issue

The Merchant Banker looks into the various factors while pricing the issue. Some of the factors are past financial performance of the company, Book value per share, stock market performance of the shares. The Merchant Banker has a vital role to play in pricing of the instrument.

59

Merchant Banking

Marketing of the Issue

Marketing of the issue is a vital responsibility of the Merchant Banker. The first stage is Pre-issue marketing for placement of the issue with the financial institutions, banks, mutual funds, FIIs and NRIs. The second stage is the marketing of the issue to the general public through various vehicles such as press, brokers, etc.

Bought out Deals

The concept of wholesale but out of public offerings by the Merchant Bankers started off with over the Counter Exchange of India where a Merchant banker acts also as a sponsor and either takes up the entire issue to be offered wholly of jointly with other co-investors and off-loads the same to the public at a later date by an offer for sale. Major amendments were made to the SEBI regulations regarding Merchant Bankers. The duration of this transaction period has not officially been announced.

60

Merchant Banking

REGISTRATION OF MERCHANT BANKER

The term Merchant Banking originated in the 18th and early 19th centuries in the United Kingdom when trade between countries was financed by bills of exchange drawn on the principal merchant houses. With the increase in international trade, the established merchants started the practice of lending their names to the new comers and accepting the bills of exchange on their behalf. They would charge a commission for the purpose and thus acceptance business became the hallmark of Merchant Bankers. Once these banks had gained the confidence of the government, they also entrusted with the job of issuing bonds in the London market.

An applicant should comply with the following norms:

The applicant should be a body corporate The applicant should not carry on any business other than those connected with the securities market The applicant should have necessary infrastructure like office space, equipment, manpower etc. The applicant must have at least two employees with prior experience in merchant banking Any associate company, group company, subsidiary or interconnected company of the applicant should not have been a registered merchant banker The applicant should not have been involved in any securities scam or proved guilt for any offence The applicant should have a minimum net worth of Rs.5 crores
61

Merchant Banking

PLAYERS IN MERCHANT BANKING

1. ENAM

ENAM was founded in1984 to provide knowledge-driven financial services at the time when Indian economy investors faced a bewildering array of options. ENAM is the one of the largest underwriters in India. ENAM offers promising & exciting companies the opportunity of assessing the public market equity finances. ENAMs long-term association with capital markets & primary markets has provided it with deep insights of the functioning of Indian financial institutions. The merchant banking services provided by ENAM are: -

Equity debt/syndication:
Raising capital through a private placement of a companys securities is an effective & timely offering to a public offering. ENAM represents the clients in the private placement of debt and equity with institutional & high net worth investors.

Corporate Restructuring: ENAM provides client with strategic and practical solutions to financial challenges. Their restructuring services includes Mergers & Acquisitions, Takeovers, Debt restructuring, Buyers services etc.
62

Merchant Banking

ENAM also provide the seed stage services, value creation services and IPOs advisory services which are represented below:

63

Merchant Banking

2. ICICI SECURITIES

ICICI Securities Limited is a leader across the spectrum of Merchant Banking. We are experienced in every aspect of the business from domestic and international capital markets advisory, to M&A advisory, Private Equity syndication, Restructuring and infrastructure advisory. Our investment banking team, based across key cities in India and New York, London, and Singapore consists of professionals with expertise across a range of industries. ICICI SECURITIES provide following services: Mergers and Acquisitions: ICICI Securities Limited is amongst the first Indian investment Banks to form a dedicated M&A practice and continues to be a leader by providing innovative and unique solutions to achieve varied objectives of the client. They offer a full range of advisory services, which include joint ventures, mergers, acquisitions, and divestitures.

64

Merchant Banking

Equity Capital Markets: ICICI Securities Limited is at the forefront of capital markets advisory having been involved in most major book building and fixed price offerings over the last decade. It is amongst the leading underwriters of Indian equity and equity-linked offerings.

Infrastructure Advisory: ICICI Securities Limited has a dedicated infrastructure vertical focused on assisting clients in identifying and capitalising on the opportunities thrown up by the all pervasive boom in the Indian infrastructure sector. Dealing with Bulls and Bears: ICICI Securities Limited assists global institutional investors to make the right decisions through insightful research coverage and a client focused Sales and Dealing team. The equity group leverages research and distribution reach to domestic and foreign institutional investors in case of public offerings. Thus the quality of analysis and client servicing standards, are a testimony to the quality of ICICI SECURITIES team.

65

Merchant Banking

3. KOTAK SECURITIES LIMITED

Kotak Securities Limited, a subsidiary of Kotak Mahindra Bank, is the stock broking and distribution arm of the Kotak Mahindra Group. The company was set up in 1994. Kotak Securities is a corporate member of both The Bombay Stock Exchange and The National Stock Exchange of India Limited. Its operations include stock broking and distribution of various financial products - including private and secondary placement of debt and equity and mutual funds. Currently, Kotak Securities is one of the largest broking houses in India with wide geographical reach. The company has four main areas of business: Kotak Institutional Equities: -

66

Merchant Banking

Kotak Institutional Equities, among the top institutional brokers in India. It mainly covers secondary market broking and the marketing of equity offerings, including IPOs, to domestic and foreign institutional investors. Structured Finance (Project Finance & Advisory Business): KMCC has developed expertise in various vertical segments in the infrastructure sector including power, oil, gas, ports, automobiles, steel & metals and hotels, by offering structured finance solutions. Some of the transactions executed by this team include: Advisor to Ford on financial closure for its Car project in India. Advisor to one of the largest LNG projects on the Western coast of India. Financial advisors and loan syndications to British Gas and GAIL.

Mergers & Acquisitions: In the area of Mergers & Acquisitions, we provide our clients expertise and a comprehensive set of services that help them achieve their strategic and financial objectives. Our spectrum of services include: Divestments Spin-Offs / Restructuring &Joint Ventures / Strategic Alliances

67

Merchant Banking

4. CITIGROUP

Citigroup Corporate and Investment Banking achieve the extraordinary for our clients around the world. No financial institution is more committed to advancing the goals of its clientsour diverse and talented staff in more than 100 countries advises companies, governments and institutions on the best ways to realize their strategic objectives. We create solutions for and provide the broadest possible capital and market access to thousands of issuer and investor clients. And no institution better executes the increasingly complex payment and cash management solutions required in today's global economy. The features Citigroup are as follows: Over the years, Citigroup has established a track record of outstanding business milestones such as Cash Management, pioneered by Citigroup in 1986 and utilized by over 900 Corporates with through-puts totaling around $ 35 billion (8% of India's GDP). It is India's largest foreign bank in the FX (foreign exchange) market with a 14 per cent market share. As the leading custodian, Citibank has over $22 billion of custody assets under management.

68

Merchant Banking

5. DSP MERRILL LYNCH LTD.

DSP Merrill Lynch Limited (DSPML), among India's leading investment banking and brokerage company, is a culmination of a long standing relationship between DSP Financial Consultants Ltd., and Merrill Lynch & Co., the leading international capital raising, financial management and advisory company. DSPML is a full service investment bank and broking company with leadership position in M&A, Capital Raising, Securities Research, Equity & Debt Brokering, and Investment Advisory services. Euro money Magazine has ranked DSPML as the "Best Domestic Securities firm in India" for the last four consecutive years. This Transaction heralds DSPML as a key player in the private equity market. The service features of DSPML are as follows: DSPML has consistently been rated as one of India's leaders in origination, distribution, and trading of equity and debt securities. DSPML has consistently brought reputable issues to the capital markets. A diverse client base made up of India's most prestigious private and public sector corporations and multinational corporations have rendered DSPML a commanding presence in the Indian capital market.

69

Merchant Banking

Through direct market's group, DSPML offers investors access to every major initial or subsequent public offering. DSP Merrill Lynch is the leading underwriter of Indian equity and equity-linked offerings across domestic and international markets. By leveraging their extensive knowledge of local markets and global resources, they have delivered innovative and customized solutions to their clients.

70

Merchant Banking

6. UPFC(Uttar Pradesh Financial Corporation)

Scheme for merchant banking & financial services Decades ago UPFC has taken a humble step for the industrial development of U.P. by providing term loan assistance to small & medium scale units. Since then it has acquired a matured professional approach in Industrial Financing, several small-scale units nurtured by UPFC has groomed into big enterprises. In order to meet the challenges of liberalized policy of the Government & Changed economic Scenario, UPFC has started Merchant Banking & other financial Services to serve its valued clients. UPFC, a category-I Merchant Banker with unmatched expertise in project appraisal and term lending offers a whole gamut of Merchant Banking Services. 1. Issue management: UPFC provides expert services to manage public issues of the companies successfully; it has already managed Public Issues as a lead Manager with great success. 2. Underwriting: In order to provide a protective umbrella to the public issues of its clients, UPFC also underwrites the issue. 3. Subscription to equity share: UPFC subscribes to the equity shares reserved under FI quota, to enable the company to market the public issue effectively.
71

Merchant Banking

4. Advisory services: UPFC, with its long experience, advises its clients for various advisory services such as capital Structuring, loan syndication etc. 5. Project certification: UPFC also certifies the projects going to capital markets for raising funds. This is a specialized activity of the Corporation. 6. Other financial services: As a part of its commitment to provide professionalized financial services to its clients, UPFC also offers Bill Discounting, Equipment Leasing & Hire Purchase Services, Short- term loan, Brand Equity loan, etc to meet diversified requirements of it's clients

72

Merchant Banking

7. JM Morgan Stanley
Investment Banking focuses on capital raising, mergers, acquisitions, restructuring and financial advisory and private equity for Indian corporates in the international and domestic capital markets. Through innovation and value-added services, the firm has contributed immensely to the overall development of the capital market and mergers and acquisitions in India.It have the merchant banking and underwriting licenses from the Indian securities market regulator, the Securities and Exchange Board of India. Some of the recent transactions of JM Morgan Stanley US$ 20MM fund raising for Nipuna Services (a BPO subsidiary of Satyam Computer Services) Rs. 3,219 MM preferential allotment of equity shares/ warrants in Bajaj Auto Finance Limited to financial investors and the promoter, Bajaj Auto Limited.

The services of JM Morgan Stanley are:

JM Morgan Stanley has a dedicated group that regularly interacts with over 40 financial investors in India as well as overseas.
73

Merchant Banking

JM Morgan Stanley offers research-based investment advisory and equity broking services to corporates, high net-worth individuals and retail investors across a wide range of financial products.

They are known for lead managing some of the most complex and innovative and large equity and debt offerings in India and abroad by the Indian issuers.

MERCHANT BANKING-FUTURE DEVELOPMENT

Time and again the Merchant banking Industry in India witnessed, experienced and underwent significant changes. The very purpose for which these firms are commences their services should be taken care of and they should mould their policy decision and activities to move in tune with the main objectives of Investors protection and to create healthy environment in capital markets. No doubt, Merchant Banking firms are subject to a host of control measures, regulations and rules framed and guided by SEBI. To some extent, frequent changes and /or amendments to policies and control measures, though needed for smooth working of the securities Industry, proves to be detrimental to the very existence of the Merchant Banking system in the country. The SEBIs Act 1992 confers power upon SEBI to supervise and control the affairs of the Merchant Banking firms in India. The various studies which had been undertaken in India for evaluating the performance of Merchant Banking firms and the implications of these on securities industry. No single study has been emerged so far pertaining to the evaluation of Merchant Banking firms and in-depth study on their activities as well as

74

Merchant Banking

operational and financial performance in the light of changing regulatory environment. Merchant Bankers have reason to believe they will be handicapped without the marketing support. But the worst sufferer would be the investor, especially the small investor it is this class, which forms the backbone of the capital market. As a result of the ban, the small investor would be deprived of the opportunity to study the corporate profile of the Issuer. In the absence of adequate information, they will have to depend on manipulated facts and information fed by unreliable sources. Besides, there are larger issuers arising out of SEBIs action. From the point of view of liberalisation of the economy, SEBI has taken a retrograde step. A market economy flourished through bigger markets, higher sales and lesser profits. To achieve this performance, a company needs an aggressive marketing plan and advertising effort is the main thrust to such a plan. No marketing plan can be worthwhile unless it is backed by an effective advertising plan. The ban imposed by SEBI nips the marketing plan in the bud. For the merchant banking division, the development of new services to meet the changing market conditions is an ongoing process. Today the entire merchant banking industry in India is faced with the challenge of attracting Non-resident Indian (NRI) investments into India particularly under the scheme for portfolio investments through stock exchanges. Despite the several policy liberalizations which have been announced by the Government in the past year, the response from NRIS, to date is far below expectations. One important reason for the poor response to the portfolio investment scheme is quite clearly the lack of information with the non-resident investor perturbed regarding the changing conditions in the
75

Merchant Banking

Indian stock markets. The Merchant Banking divisions is now in the process of introducing a comprehensive portfolio advisory service which will try to fill up this information gap, offer expert counseling on investment opportunities undertake to buy / sell orders, periodically evaluate the portfolio and look after all the administrative formalities, such as attending to tax returns, collections and remittances of dividends, etc. in compliance with the Reserve Bank of Indias and Securities and Exchange Board of India (SEBI) guidelines.

76

Merchant Banking

Conclusion
Merchant banking essentially involves selling an issue for a company and handling related work. in the wake of liberalization of the financial sector, we are seeing certain merchant banking prospects emerging be it an Indian company or foreign or a multinational, playing in the primary and secondary markets competitively. They are the prima donnas of the primary stage. There are about 1200 merchant bankers in the country of which the SEBI has granted registration to 790 merchant bankers in four different categories. SEBI also granted registration to 36 underwriters and 8 portfolio managers on the basis of its rules and regulations, 1993, upto the end of March 1995. They compete on an average for about RS. 15,000 crore every year. They act as lead managers, co-managers, financial advisors, etc. The domination of the public sector continues, with seven of the top ten managers coming from

its ranks. The mushroom growth of merchant banks has given rise to unethical means to sell shares. For a healthy growth of the market operation, the SEBI should enforce strict control on merchant banks and remove the weeds of manipulation and corruption in the market. Stipulation of proper checks and regulation will raise the confidence of investing public in the dynamic and vibrant market mechanism which will be in the larger interests of the society as well as of
77

Merchant Banking

economy. Infact, merchant banks should replace brokers in trading, in course of time so that the market operations will be beneficial both to the industrial sector and investor as well as other operations in the primary and secondary markets. And the merchant bankers should also pass on the profits to investors, depositors and shareholders equitably. The merchant banker plays a vital role in channelising the financial surplus of the society into productive investment avenues. Hence before selecting a merchant banker, one must decide what are the services for which he is being approached. Selecting the right intermediary who has the necessary skills to meet the requirements of the client will ensure success.

It can be said that this project helped me to understand every details about Merchant Banking and in future how its going to get emerged in the Indian economy. Hence, Merchant Banking can be considered as essential financial body in Indian financial system.

78

Merchant Banking

BIBLIOGRAPHY
Sr.No 1 2 Title Merchant Banker Merchant Banking Principles & Practices Merchant banking in India Reference H.R. SUNEJA H.R.MACHIRAJU

B.C. LAKSHMANNA & C.N KRISHNA NAIK

Merchant Banking

J.C.VERMA (3rd& 4th Edition)

BOOKS REFFERED Merchant Banker H.R. SUNEJA Merchant Banking Principles & Practices- H.R.MACHIRAJU Merchant Banking in India-

79

Merchant Banking

B.C. LAKSHMANNA & C.N. KRISHNA NAIK Merchant Banking J.C.VERMA (3rd& 4th Edition)

WEBILOGRAPHY www.google.co.in www.yahoo.com www.economictimes.com www.jmmorgansranley.com www.dspml.com www.sebi.com

80

Merchant Banking

81