Merchant Banking in India Project

Merchant Banking in India
MERCHANT BANKING
INTRODUCTION
In attracting public savings, merchant bankers play a vital role as specialized
agencies. The resources raising functions remains to be the primary business
of a merchant banker. The primary market holds the key to rapid capital
formation, growth in industrial productions and exports. There has to be
accountability to the end use of funds raised from the market. The increase
in the number of issues and amount raised the number of merchant bankers.
Therefore, the field became highly competitive market where it requires a
specialized skill in handling the situation. The merchant bankers have a
social responsibility to in building an industrial structure in India.
Merchant bankers assist corporate in raising capital. They assist in issue of

Shares, syndicating loans, public issue of debentures. They do not provide
funds.
They only assist. They also actively arrange working capital, appraisal
Projects scrutinize & persuade merger proposals.
In BRITAIN merchant bankers & investment bankers are synonymous.
In the U.S., Merchant bank means as investment bank which is well-

equipped to handle multinational corporations.
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In INDIA merchant bankers is a body corporate who carries on any activity

of the issue management, which consist of preparing prospectus & other
information relating to the issue. Merchant banks in India are not allowed to
conduct any business other than that related to securities market. There is no
official category in investment banking.
DEFINITION:
In banking, a merchant bank is a financial institution primarily engaged in
offering financial services and advice to corporations and wealthy
individuals on how to use their money. The term can also be used to
describe the private equity activities of banking.
According to Cox, D. merchant banking is defined as, “merchant banks are

the financial institutions providing specialist services which generally
include the acceptance of bills of exchange, corporate finance, portfolio
management and other banking services”.
The Notification of the Ministry of Finance defines a merchant banker as,

“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 service in relation to such issue management”.
In short, merchant bankers assist in raising capital and advice on related

issues.
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Merchant Bank
A merchant bank deals with the commercial banking needs of international

finance, long term company loans, and stock underwriting. A merchant bank
does not have retail offices where one can go and open a savings or
checking account. A merchant bank is sometimes said to be a wholesale
bank, or in the business of wholesale banking. This is because merchant
banks tend to deal primarily with other merchant banks and other large
financial institutions.
The most familiar role of the merchant bank is stock underwriting.
A large company that wishes to raise money from investors through the
stock market can hire a merchant bank to implement and underwrite the
process. The merchant bank determines the number of stocks to be issued,
the price at which the stock will be issued, and the timing of the release of
this new stock. The merchant bank files all the paperwork required with the
various market authorities, and is also frequently responsible for marketing
the new stock, though this may be a joint effort with the company and
managed by the merchant bank. For really large stock offerings, several
merchant banks may work together, with one being the lead underwriter.
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By limiting their scope to the needs of large companies, merchant banks can
focus their knowledge and be of specific use to such clients. Some merchant
banks specialize in a single area, such as underwriting or international
finance.
Many of the largest banks have both a retail division and a merchant bank
division. The divisions are generally very separate entities, as there is very
little similarity between retail banking and what goes on in a merchant bank.
Although your life is probably affected every day in some way by decisions
made in a merchant bank, most people reading this article are unlikely ever
to visit or deal directly with a merchant bank. Merchant banks operate
behind the scenes and away from the spotlight.
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Role of Merchant Banker
The role of merchant banker is dynamic in the wake of diverse nature

of merchant banking services. Merchant banker’s dynamism lies in
promptly attending to the corporate problems and suggest 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 politics affecting business conditions frequently change; where science
and technology create new innovations in production processes of industries
envisaging immediate renovations, diversifications, 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 setup in industrially backward areas to eliminate regional
imbalances in industrial development of the country.
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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 promoters with his
knowledge and skills to resolve the problems being faced by them. He has to
watch the interest and win over the confidence of the government, its
agencies, along with the entrepreneurs, the investors and the 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
to be dynamic.
In the days ahead, merchant bankers have very significant role to play
tuning their activities to the requirements of the growth pattern of the
corporate sector, the industry and the economy as a whole which is, in
it, a challenging task and to meet these challenges merchant bankers
will have to be more vigorous and strategic in playing their role. They
will have also to adopt new ways and means in discharging their role.
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The growth of Merchant banking in India

Formal merchant activity in India was originated in 1969 with the merchant
banking division setup 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. Following Grindlays Bank,
Citibank set up its merchant banking division in 1970.The division took up
the task of assisting new entrepreneurs and existing units in the evaluation of
new projects and raising funds through borrowing and equity issues.
Management consultancy services were also offered. Merchant bankers are
permitted to carry on activities of primary dealers in government securities.
Consequent to the recommendations of Banking Commission in 1972, that
Indian banks should offer merchant banking services as part of the multiple
services they could provide their clients, State Bank of India started the
Merchant Banking Division in 1972. In the initial years the SBI’s
objective was to render corporate advice and assistance to small and
medium entrepreneurs.
The commercial banks that followed State Bank of India were Central Bank
of India, Bank of India and Syndicate Bank in 1977.Bank of Baroda,
Standard Chartered Bank and Mercantile Bank in 1978 and United Bank of
India, United Commercial Bank, Punjab National Bank, Canara Bank and
Indian Overseas Bank in late ‘70s and early ‘80s. Among the development
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banks, ICICI started merchant banking activities in 1973 followed by IFCI
(1986) and IDBI (1991).
Organizational setup of merchant bankers in India

In India a common organizational setup of merchant bankers to operate is in
the form of divisions of Indian and foreign banks and financial institutions,
subsidiary companies established by bankers like SBI, Canara Bank, Punjab
National Bank, Bank of India, etc. Some firms are also organized by
financial and technical consultants and professionals. Securities and
Exchange Board of India has divided the merchant bankers into four
categories based on their capital adequacy. Each category is authorized to
perform certain functions. From the point of organizational setup India’s
merchant banking organizations can be categorized into four groups on the
basis of their linkage with parent activity. They are:
(A) Institutional Base
Where merchant banks function as an independent wing or as subsidiary of

various private/Central Governments/State Governments financial
institutions. Most of the financial institutions in India are in public sector
and therefore such setup plays a role on the lines of government priorities
and policies.
(B) Banker Base
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These merchant bankers function as division/subsidiary of banking
organization. The parent banks are either nationalized commercial bank or
the foreign banks operating in India. These organizations have brought
professionalism in merchant banking sector and they help their parent

organization to make a presence in capital market.
(C) Broker Base
In the recent past there has been an inflow of qualified and professionally
skilled brokers in various stock exchanges of India. These brokers undertake
merchant banking related operations also like providing investment and
portfolio management services.
(D) Private Base
These merchant banking firms are originated in private sector. These

organizations are the outcome of opportunities and scope in merchant
banking business and they are providing skill-oriented specialized services
to their clients. Some foreign merchant bankers are also entering either
independently or through some collaboration with their Indian counterparts.
Private sector merchant banking firms have come up either as the sole
proprietorship or public limited companies. Many of these firms were in
existence for quite some times before they added a new activity in the form
of merchant banking services by opening new divisions on the lines of
commercial banks and All India Financial Institutions.
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Requirements for setting up a merchant banking outfit

1. Formation of the Business Organization
SEBI act, 1992 does not prescribe any specific form of business
organization to carry on the activities as merchant banker. However, the
types of organizations are listed below:
a. Sole proprietorship
b. Partnership firm
c. Hindu Undivided Family (HUF)
d. Corporate Enterprises
e. Co-operative Society
Generally it is preferred that the Merchant Banking outfit be a registered

company. Merchant Banks are generally setup as subsidiary companies of
banks (Public or Private). For example, SBI caps, ICICI Securities etc.
2. Adoption of a viable business plan
All the basic tests required to find out whether the business to be undertaken
is viable or not are also applicable to a Merchant Banking setup. Capital
adequacy, profitability, growth opportunities and current market size are
some of the factors which need to be looked into.
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3. Registration of Merchant Bankers
a. Application for grant of certificate
An application for grant of a certificate needs to be made to SEBI .
The application can be made for any one of the following categories of the
merchant banker namely:-
• Category I, that is –
(i) 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; and
(ii) to act as adviser, consultant, manager, underwriter, portfolio manager.
• Category II, that is, to act as adviser, consultant, co- manager,

underwriter, portfolio manager;
• Category III, that is to act as underwriter, adviser, consultant to an
issue;
• Category IV, that is to act only as adviser or consultant to an issue.
To carry on the activity as underwriter or portfolio manager a separate

certificate of registration needs to be obtained from SEBI.
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b. Application to conform to the requirements
The application should conform to all the requirements under the SEBI
guidelines, otherwise it may be rejected.
c. Furnishing of information, clarification and personal

representation
The Board may require the applicant to furnish further information or

clarification regarding matters relevant to the activity of a merchant banker
for the purpose of disposal of the application. The applicant or its principal
officer may appear before the Board for personal representation.
d. Consideration of application
The Board shall take into account for considering the grant of a certificate,
all matters, which are relevant to the activities relating to merchant banker
and in particular the applicant complies with the following requirements,
namely: -
• the applicant shall be a body corporate other than a non- banking

financial company
• the merchant banker who has been granted registration by the Reserve
Bank of India to act as a Primary or Satellite dealer may carry on such
activity subject to the condition that it shall not accept or hold public
deposit
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• the applicant has the necessary infrastructure like adequate office
space, equipments, and manpower to effectively discharge his
activities
• the applicant has in his employment minimum of two persons who
have the experience to conduct the business of the merchant banker
• a person directly or indirectly connected with the applicant has not

been granted registration by the Board;
• the applicant fulfils the capital adequacy requirement is as follows:
The capital adequacy requirement should not be less than the net worth of
the person making the application for grant of registration. The networth
shall be as follows,
Category Minimum Amount

Category I Rs. 5, 00, 00, 000
Category II Rs. 50, 00, 000
Category III Rs. 20, 00, 000
Category IV Nil
• the applicant, his partner, director or principal officer is not involved

in any litigation connected with the securities market which has an
adverse bearing on the business of the applicant and have not at any
time been convicted for any offence involving moral turpitude or has
been found guilty of any economic offence
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• the applicant has the professional qualification from an institution
recognised by the Government in finance, law or business
management
• grant of certificate to the applicant is in the interest of investors.
e. Procedure for Registration
The Board on being satisfied that the applicant is eligible shall grant a
certificate. On the grant of a certificate the applicant shall be liable to pay
the fees as prescribed.
f. Payment of fees and the consequences of failure to pay fees
Every applicant eligible for grant of a certificate shall pay such fees in such
manner and within the period specified.
Where a merchant banker fails to pay the Annual fees as provided in

Schedule II, the Board may suspend the registration certificate, whereupon
the merchant banker shall cease to carry on any activity as a merchant
banker for the period during which the suspension subsists.
The Merchant Bank can commence business on acquisition of a Certificate

of Registration from the SEBI after completion of the above mentioned
formalities.
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Main Objectives Of Merchant Bankers
Merchant bankers render their specialized assistance in achieving the

main objectives which are presented below:
1. To carry on the business of merchant banking, assist in the capital

formation, manage advice, underwrite, provide standby assistance,
securities and all kinds of investments issued, to be issued or
guaranteed by any company, corporation, society, firm, trust person,
government, municipality, civil body, public authority established in
India.
2. The main object of merchant banker is to create secondary market for
bills and discount or re-discount bills and acts as an acceptance house.
3. Merchant banker’s another objective is to set up and provide services
for the venture capital technology funds.
4. They also provide services to the finance housing schemes for the
construction of houses and buying of land.
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5. They render the services like foreign exchange dealer, money
exchange, and authorized dealer and to buy and sell foreign exchange
in all lawful ways in compliance with the relevant laws of India.
6. They will invest in buying and selling of transfers, hypothecate and
deal with dispose of shares, stocks, debentures, securities and
properties of any other company.
Obligations and Responsibilites
Merchant bankers have the following obligations and responsibilities.
1. Merchant banker should maintain proper books of accounts, records

and submit half yearly/annual financial statements to the SEBI within
stipulated period of time.
2. No merchant banker should associate with another merchant banker
who is not registered in SEBI.
3. Merchant bankers should not enter into any transactions on the basis
of unpublished information available to them in the course of their
professional assignment.
4. Every merchant banker must submit himself to the inspection by
SEBI when required for and submit all the records.
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5. Every merchant banker must disclose information to the SEBI when it
requires any information from them.
6. All merchant bankers must abide by the code of conduct prescribed
for them.
7. Every merchant banker who acts as lead manager must enter into an
agreement with the issuer setting out mutual rights, liabilities,
obligations, relating to such issues with particular reference to
disclosures allotment, refund etc.
Code of Conduct
According to the 13 Regulation of the SEBI of 1992 (Merchant

bankers), every merchant banker should comply with following codes of
conduct. They are:
a) The merchant banker must observe high integrity and fairness in all
his dealings.
b) He shall render at all times high standard of services, exercise due
diligence, exercise independent professional judgement.
c) If necessary, he must disclose to his clients the possible source of
conflict of duties and interests.
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d) The merchant banker should not indulge in unfair practice or unfair
competition with other merchant bankers.
e) He should not make any exaggerated statement about his capacity or
achievement.
f) He should always Endeavour to give the best possible advise and
prompt efficient and cost effective service.
g) He should maintain the secrecy of all the confidential information
received during the course of service to his client.
h) He should not engage in the creation of a false market or price rigging
or manipulation.
Guidelines of SEBI
After the obligations of the CCI, the place was occupied by a legal organ
called as “Securities and Exchange Board of India”. The issue of capital and
pricing of issues by companies has become free of prior approval. The SEBI
has issued guidelines for the issue of capital by the companies. The
guidelines broadly covers the requirement of the first issue by a new or the
first issue of a new company set up by the existing company, the first issue
by the existing private companies and public issues by the existing listing
companies. The SEBI is the most powerful organization to control and lead
both the primary market and secondary market.
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The SEBI has announced the new guidelines for the disclosures by the
Companies leading to the investor protection. They are presented
below:
a) If any Company’s other income exceeds 10 per cent of the total

income, the details should be disclosed.
b) The Company should disclose any adverse situation which affects the
operations of the Company and occurs within one year prior to the
date filing of the offer document with the Registrar of Companies or
Stock Exchange.
c) The Company should also disclose the information regarding the
capacity utilization of the plant for the last 3 years.
d) The Promoters of the Company must maintain their holding at least at
20 per cent of the expanded capital.
e) The minimum application money payable should not be less than 25

per cent of the issue price.
f) The company should disclose the time normally taken for the disposal
of various types of investor’s grievances.
g) The Company can make firm allotments in public issues as follows:
 Indian mutual funds (20%),
 FIIS (24%),
 Regular employees of the company (10%),
 Financial institution (20%).
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h) The Company should disclose the safety net scheme or buy back
arrangements of the shares proposed in public issue. This scheme is
applicable to a limited number of 500 shares per allottee and the offer
should be valid for a period of at least 6 months from the date of
dispatch of securities.
i) According to the guidelines, in case of the public issues, at least 30
mandatory collection centres should be established.
j) According to the SEBI guidelines regarding rights issue, the
Company should give advertisements in not less than two news-
papers about the dispatch of letters of offer. No preferential allotment
may be made along with any rights issue.
k) The Company should also disclose about the fee agreed between the
lead managers and the Company in the memorandum of
understanding.
Merchant banks and Commercial banks
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Merchant banks Commercial banks
1) Assist in raising capital in the form of Provide funds in the form of

equity, preference shares, and syndicated term loan and working capital.
loan working capital instruments.
2) Advisor not financer. Financing is the main business.
3) Do not accept chequable deposits. Demand deposits are the key

feature.
4) Mainly fees based business. Mainly fund based business
5) Being advisors, they are closer to the Being lenders, they are more
customers and get to know risks of the cautions, assess risks in lending
transaction s properly. They work on proposal and cannot afford to be
risks shields i.e. mitigation measures grossly relationship based and
close to the customer.
6) Most of work they get is about Commercial banks majority

management of equity issues in the business is of terms lending and
capacity of lead manager, underwriter, bank deposits.
piercing of issue, book running, and
liaisoning with SEBI.
Services of Merchant Bankers In India:-
Merchant bankers provide services as follows:
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Business planning stage: 1)project feasibility study
2)advice on capital structuring
Equity raising: 3)preparation of prospectus and
liaison with SEBI
4)pricing decisions
5)marketing in the capacity of lead
managers
6)underwriters to the issue
7)post issue management
8)assistance in ADR/GDR
Debt raising: 9)management of debenture issue
10)preparation of bankable proposal
and syndication of loan
Working capital raising: 11)assistance in arranging optimal
capital finance
Strategic advice: 12)advice on mergers and
acquisitions
13)corporate structuring advice
SERVICES PROVIDED BY MERCHANT BANKS: (in detail)
The development activity through the country had exerted excess demand on
the sources of funds by the ever expanding industry and trade which could
not be met by the All India Financial Institutions. In these circumstances, the
corporate sector enterprises had the only alternative to avail themselves of
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the capital market services for meeting the long-term fund requirements
through capital issues of equity and debentures. The growing demand for
funds from capital market has enthusied many organizations to enter into the
field of merchant banking for managing the public issues.
The need of merchant banker is also felt in the wake of huge untapped
public savings as merchant bankers can play a highly significant role in
mobilizing funds from savers to invest in channels assuring promising return
on investments and thus narrow down the gap between demand for and
supply of investible funds.
Merchant bankers not only provide advisory services to corporate

enterprises but also advise the investors of the incentives available in
the form of tax relief and other statutory obligations. 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 expectation of higher yields.
Broadly a merchant banker can provide the following services:
1. Corporate Counseling
2. Project Counseling And Pre-Investment Studies
3. Credit Syndication And Project Finance
4. Issue Management
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5. Underwriting
6. Bankers
7. Portfolio Management
8. Venture Capital Financing
9. Leasing
10.Non-Resident Investment Counseling And Management
11.Acceptance Credit And Bill Discounting
12.Advising On Mergers, Amalgamations And Take-Over
13.Arranging Offshore Finance
14.Fixed Deposit Broking
15.Relief To Sick Industries
Let’s take a brief look at each of these functions:
Corporate Counseling
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It includes a whole range of financial services provided by a merchant
banker to a corporate unit a view to ensure better performance, maintain
steady growth and create a better image among investors.
It covers the entire field of merchant banking activities i.e., project

counseling, capital restructuring, portfolio management and the full range of
financial engineering including venture capital, public issue management,
loan syndication, working capital, fixed deposits, lease financing,
acceptance credit, etc. However, the scope of corporate counseling is limited
to suggestions and opinions leaving to the client to take corrective actions
for solving its corporate problems.
A merchant banker finds out the problems of enterprise, which shall include
organizational goals for the enterprise, size of the organization and
operational scales, choice of a product, pricing, etc, and suggests ways and
means to solve those problems.
Project Counseling
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Project counseling is an important merchant banking service which includes
preparation of project reports, deciding upon the financing pattern to finance
the cost of the project, appraising the project report with the financial
institutions/banks.
Project reports are prepared to obtain government approval of the project,

for procuring financial assistance from financial institutions and banks, for
ensuring market for the proposed product, for planning public issues, etc.
Financing the project cost is an important aspect of project counseling. The

two sources of funds available to finance the project cost are internal sources
of funds (or owners' funds) which includes promoter's contribution and
retained earnings; and external sources of funds which refers to the
borrowed funds in the form of loans from banks, private investors and
financial institutions and in the form of debentures from the public.
Merchant banker has to decide the financing mix of the internal and external
sources of funds keeping in view the rules, regulations and norms prescribed
by the government or followed by the term lending financial institutions.
While rendering project counseling services, the merchant banker has to

ensure that the application forms for obtaining the funds from financial
institutions are filled in with relevant and appropriate information and before
submitting the application, the merchant banker has to appraise the project
considering the various aspects as to the type of the project, location,
technical, commercial and financial viability of the project.
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Credit Syndication
Once the client company has decided about the project proposed to be
undertaken, the next step is looking for the sources wherefrom the funds
could be procured to implement the project.
Merchant banker has to locate the sources of funds and comply the
formalities required to procure the funds. This service rendered by the
merchant banker in arranging and procuring credit from financial
institutions, banks and other lending and investment organizations for
financing the clients' project cost or meeting working capital requirement is
referred to as loan syndication or credit syndication.
Credit syndication in case of domestic borrowings is with the institutional

lenders and banks. Long and medium term funds are obtained from the All
India Financial Institutions like IFCI, IDBI etc., state level financial bodies
like SFC, SIDC etc., commercial banks, mutual funds etc. Short-term funds
are also required by the firm for purchase of raw materials, payment of
wages, salaries etc. Sources of financing these short term requirements or
working capital needs can be from internal sources like internal accruals
from working or operations and short term loans from friends and relatives;
or from external sources like short term borrowings from banks etc.
Issue Management and Underwriting
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Management of capital issues is a professional service rendered by the
skilled and experienced merchant bankers. Previously, the managing agents
for a particular corporate used to manage public issues. The abolition of the
managing agency system, the growth in the public limited companies in
number and size, the imposition of new rules and regulations regarding the
public issue of securities made it necessary for merchant bankers to play a
definite role in the management of public issues.
Public issue management involves marketing of corporate securities by

offering the securities to the public, procuring private subscription to the
securities and offering securities to existing shareholders of the company.
As a manager to the public issue, the merchant banker, before the public
issue has to obtain the consent of the stock exchanges to the memorandum
and articles of association, appoint other managers, bankers, underwriters,
brokers etc. ,advice the company to appoint auditors, solicitors and board of
directors, draft the prospectus and obtain consent from the companies legal
advisors, board of directors and other concerned parties, file the prospectus
with registrar, make an application for enlistment with stock exchanges and
finally advertise for the issue.
A merchant bankers post issue activities include final allotment and/or

refund of subscription amount, calculation of underwriters liability in case
of under subscription and complying the necessary statutory requirements
for listing of securities on the stock exchange.
Under writing of public issue
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A fully underwritten public issue spells confidence to the investing public,
which ensures a good response to the issue. Keeping this in view companies,
which float a public issue usually, desire a full underwriting of the issue.
Underwriting is only the guarantee given by the underwriter that in the event
of under subscription, the amount underwritten would be subscribed in
proportion by the underwriter. An underwriter of the issue gets the following
benefits:
• It earns a commission of the commitment given.

• It earns the right to be appointed as bankers of that issue.
• It expands its clientele by underwriting more and more issues.
Bankers to the Issue
The merchant banker can automatically become the banker to the issue in
the following cases:
• The bank is a broker to the company

• It has given underwriting commitments.
• It acts as a manger to the issue
• The function of a banker to the issue is to accept application forms
from the public together with subscription money and transfer them to
the account of the controlling branch.
Portfolio Management
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Portfolio refers to investment in different types of marketable securities or
investment papers like shared, debentures and debenture stocks, bonds etc.
from different companies or institutions held by individuals firm or
corporate units.
Portfolio management refers to managing efficiently the investment in the

securities held by professionals to others.
Merchant bankers take up management of a portfolio of securities on behalf

of their clients, providing special services with a view to ensure maximum
return by such investments with a minimum risk of loss of return on the
money invested in securities.
A merchant banker while performing the services of portfolio management

has to enquire of the investment needs of the client, the tax bracket, ability
to bare risk, liquidity requirements, etc. they should study the economic
environment affecting the capital market, study the securities market and
identify blue chip companies in which money can be invested. They should
keep record of latest amendment in government guidelines, stock exchange
regulations, RBI regulations, etc.
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Qualities of merchant bankers:-
To be a successful merchant banker, following qualities are necessary:
1. Knowledge: Thorough understanding of technical issues related to
business, understanding of legal and statutory requirements, appreciation

of business acumen; financial expertise is a key thing a merchant banker
must know. Delivery of his services depends on his basic understanding
of these issues.
2. Capital market familiarity: Merchant banker should be well versed
with stock markets, their movements. He should track imp happenings in

the market on ongoing basis.
3. Liasioning ability: Merchant bankers are required to liaison with SEBI,
RBI, the stock exchanges, depositories and other government authorities

for public issue related duties. It is imperative that a merchant bank
maintains excellent rapport with all of them and also close relations even
at informal levels. This only can see speedy and favorable clearances by
the authorities.
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4. Innovation: Corporate may approach with unique requirements.
Standard solutions and products may not solve problems sometimes.

Merchant bankers should do out of box thinking and be able to do
financial engineering. They can device new financial instruments and get
approved from the authorities. Innovation is required even to address
stringent legal requirements.
5. Integrity: Merchant banker has valuable and confidential information of
its customers. Merchants bankers should take utmost care that the
information is not leaked and also not consumed for the purpose other
than for which it was disclosed to the merchant banker.
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Progress of Merchant Banking in India:-

Upto 1970, there were only two foreign banks which performed
merchant banking operations in the country. SBI was the first Indian
commercial bank and ICICI the first financial institution to take up the
activities in 1972 and 1973 respectively. As a result of buoyancy in the
capital market in 1980’s some commercial banks set – up their subsidiaries
to operate exclusively in merchant banking industry. In addition, a number
of large stock broking firms and financial consultants also entered into
business. Thus, by the end of the end of 1980’s there were 33 merchant
bankers belonging to three major segments viz., commercial banks, all
India financial institutions, and private firms. Merchant banking
functions of these institutions was related only to management of new
capital issues.
Merchant banking industry which remained almost stagnant and
stereotyped for over two decades, witnessed an astonishing growth after the
process of economic reforms and deregulation of Indian economy in 1991.
The number of merchant banks increased to 115 by the end of 1992-93 300
by the end of 1993-94 and 501 by the end of August, 1994. all merchant
bankers registered with SEBI under four different categories include 50
commercial banks, 6 all Indian financial institutions – ICICI, IFCI, IDBI,
IRBI, Tourism Finance corporation of India, infrastructure Leasing and
Financial Services Ltd. and private merchant bankers.
33

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Merchant Banking in India

Merchant bankers assist corporate in raising capital. They assist in issue of

In BRITAIN merchant bankers & investment bankers are synonymous.

In the U.S., Merchant bank means as investment bank which is well-

In INDIA merchant bankers is a body corporate who carries on any activity

According to Cox, D. merchant banking is defined as, “merchant banks are

The Notification of the Ministry of Finance defines a merchant banker as,

In short, merchant bankers assist in raising capital and advice on related

A merchant bank deals with the commercial banking needs of international

The most familiar role of the merchant bank is stock underwriting.

Role of Merchant Banker

The role of merchant banker is dynamic in the wake of diverse nature

He has to guide the wider section of the community possessing surplus

The growth of Merchant banking in India

Organizational setup of merchant bankers in India

(A) Institutional Base

Where merchant banks function as an independent wing or as subsidiary of

(B) Banker Base

professionalism in merchant banking sector and they help their parent

(C) Broker Base

(D) Private Base

These merchant banking firms are originated in private sector. These

Requirements for setting up a merchant banking outfit

Generally it is preferred that the Merchant Banking outfit be a registered

2. Adoption of a viable business plan

3. Registration of Merchant Bankers

a. Application for grant of certificate

An application for grant of a certificate needs to be made to SEBI .

(ii) to act as adviser, consultant, manager, underwriter, portfolio manager.

• Category II, that is, to act as adviser, consultant, co- manager,

To carry on the activity as underwriter or portfolio manager a separate

b. Application to conform to the requirements

c. Furnishing of information, clarification and personal

The Board may require the applicant to furnish further information or

• the applicant shall be a body corporate other than a non- banking

• a person directly or indirectly connected with the applicant has not

Category Minimum Amount

• the applicant, his partner, director or principal officer is not involved

e. Procedure for Registration

f. Payment of fees and the consequences of failure to pay fees

Where a merchant banker fails to pay the Annual fees as provided in

The Merchant Bank can commence business on acquisition of a Certificate

Main Objectives Of Merchant Bankers

Merchant bankers render their specialized assistance in achieving the

1. To carry on the business of merchant banking, assist in the capital

Obligations and Responsibilites

Merchant bankers have the following obligations and responsibilities.

1. Merchant banker should maintain proper books of accounts, records

According to the 13 Regulation of the SEBI of 1992 (Merchant

a) If any Company’s other income exceeds 10 per cent of the total

e) The minimum application money payable should not be less than 25

Merchant banks and Commercial banks

1) Assist in raising capital in the form of Provide funds in the form of

2) Advisor not financer. Financing is the main business.

3) Do not accept chequable deposits. Demand deposits are the key

6) Most of work they get is about Commercial banks majority

Services of Merchant Bankers In India:-

Merchant bankers provide services as follows:

SERVICES PROVIDED BY MERCHANT BANKS: (in detail)