PROJECT ON

MERCHANT BANKING
SUBMITTED BY:
SANJALI MUKADAM
TYBBI
SUBMITTED TO:

UNIVERSITY OF MUMBAI
PROJECT GUIDE:
PARUL SINGHAL
ACADEMIC YEAR:
2016-17
MERCHANT BANKING

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DECLARATION

I SANJALI MUKADAM from THAKUR COLLEGE OF SCIENCE &

COMMERCE, student of B.COM BANKING AND INSURANCE (SEMESTER
V), hereby submit my project report on MERCHANT BANKING.
I also declare that this project which is the partial fulfillment of the requirement for
the degree of T.Y.B.Com (Banking & Insurance) of the MUMBAI UNIVERSITY
is the result of my own efforts with the help of experts.

DATE:

SANJALI MUKADAM

PLACE:

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CERTIFICATE

This is to certify that the project entitled MERCHANT BANKING is successfully

done by SANJALI MUKADAM during the Third Year FIFTH SEMSETER of
B.COM (BANKING & INSURANCE) under the University of Mumbai through
Thakur College of Science and Commerce, Kandivali, Mumbai-400101.

Co-ordinator

Project Guide

Principal

Date:
Place:

Internal Examiner

MERCHANT BANKING

External Examiner

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ACKNOWLEDGEMENT

It gives me immense pleasure in presenting the project on MERCHANT

BANKING. The preparation of this project report would not have been possible
without the support of and invaluable inputs from key individuals.
I express my thanks to the Principal Dr. C.T. CHAKRABORTY of, THAKUR
COLLEGE, Kandivali, Mumbai, for extending her support.
I am sincerely thankful to my project guide Dr. PARUL SINGHAL for her
valuable support and exceptional guidance throughout my project. I express my
gratitude for her valuable insights and suggestions and continuous support without
which this project could not have reached successful completion.
I would also like to thank our Coordinator Prof. NIRAV R. GODA for supporting
me & providing me with the material and knowledge to make this project a
success. I convey my deep appreciation to him for sparing his valuable time and
efforts, so as to make me capable of presenting this project
I am also thankful to all the respondents who spared their valuable time for lling
up the questionnaire and helped me out with this project. Finally, I would like to
thank my parents and all my friends, who provided me with their constant support
and took the pain to help me in completing the project.
I hope that I have succeeded in presenting this project to the best of my abilities.

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INDEX
Table of Contents
Introduction

Summary

History of Merchant Banking 7

Traditional Merchant Banking

Modern Merchant Banking

Main Objectives of Merchant Banking

Scope for growth of Merchant Banking

Role of Merchant Banking

Guidelines of SEBI

Investment Banking v/s Merchant Banking

Functions of Merchant Banking

Statement of Problems

24

Objectives of the Study

25

Scope of the Study

Significance of the Study

25

Limitations of the Study

25

Case Studies

13

17
18

19

25

27

Review of Literature 33
Research Methodology47

Method of Data Collection

Data Presentation and Analysis

47
48

Questionnaire 57
Observations and Suggestions 59
Conclusion

60

References and Bibliography 61

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INTRODUCTION
SUMMARY
Merchant Banking is an important service provided by a number of nancial institutions that
helps in the growth of the corporate sector which ultimately reects into the overall economic
development of the country. Merchant banks were expected to perform several functions like
issue management, underwriting, portfolio management, loan syndication, consultant, advisor
and host of other activities. SEBI was also made all powerful to regulate the activities of
merchant banks in the best interest of investors and economy. Apart, merchant banking was the
necessity of banks themselves which were in need of non-fund based income so as to improve
their protability margins by all means in the changed economic scenario. Now, it could be
anybody's anxiety to know whether merchant banks are performing their duties honestly as they
were expected to do, what duties they performs most and in what capacity, whether merchant
banking business helped banks to improve their overall protability, does the socio, political and
economic environment prevailing today sufficiently warrant the growth of merchant banking or
otherwise? An honest attempt is being made to seek answer of these questions and also to
suggest remedial measures wherever possible on the basis of empirical study done.
Original Denition: A Merchant Bank is a British term for a bank providing various nancial
services such as accepting bills arising out of trade, providing advice on acquisitions, mergers,
foreign exchange, underwriting new issues, and portfolio management.
The Focus Denition: In banking, a merchant bank is a traditional term for an Investment Bank.
It can also be used to describe the private equity activities of banking.
Amidst the swift changes sweeping the nancial world, Merchant Banking has emerged as an
indispensable nancial advisory package. Merchant banking is a service-oriented function that
transfers capital from those who own to those who can use it. They try to identify the needs of
the investor s & corporate sector & advice entrepreneurs what to do to be successful.
The merchant banking has been dened as to what a merchant banker does. A merchant Banker
has been dened by Securities Exchange Board Of India (Merchant Banker) rules, 1992, as
Any person who is engaged in the business of issue management either by making
arrangements regarding selling, buying or subscribing to securities or acting as manager,
consultant, advisor or rendering corporate advisory services in relation to such issue
management.

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BRIEF HISTORY
In late 17th and early 18th century Europe, the largest companies of the world was merchant
adventurers. Supported by wealthy groups of people and a network of overseas trading posts,
they collected large amounts of money to nance trade across parts of the world. For example,
The East India Trading Company secured a Royal Warrant from England, providing the rm with
ofcial rights to lucrative trading activities in India. This company was the forerunner in
developing the crown jewel of the English Empire. The English colony was started by what we
would today call merchant bankers, because of the rm's involvement in nancing, negotiating,
and implementing trade transactions. The colonies of other European countries were started in
the same manner. For example, the Dutch merchant adventurers were active in what are now
Indonesia; the French and Portuguese acted similarly in their respective colonies. The American
colonies also represent the product of merchant banking, as evidenced by the activities of the
famous Hudson Bay Company. One does not typically look at these countries economic
development as having been fueled by merchant bank adventurer s. However, the colonies and
their progress stem from the business of merchant banks, according to today's accepted sense of
the word. Merchant banks, now so called, are in fact the original "banks". These were invented in
the middle Ages by Italian grain merchants. As the Lombardy merchants and bankers grew in
stature on the back of the Lombard plains cereal crops many of the displaced Jews who had ed
persecution after 613 entered the trade. They brought with them to the grain trade ancient
practices that had grown to normalcy in the middle and Far East, along the Silk Road, for the
nance of long distance goods trades. The Jews could not hold land in Italy, so they entered the
great trading piazzas and halls of Lombardy, alongside the local traders, and set up their benches
to trade in crops. They had one great advantage over the locals. Christians were strictly forbidden
the sin of usury. The Jewish newcomers, on the other hand, could lend to farmers against crops in
the eld, a high-risk loan at what would have been considered usurious rates by the Church, but
did not bind the Jews. In this way they could secure the grain sale rights against the eventual
harvest. They then began to advance against the delivery of grain shipped to distant ports. In both
cases they made their prot from the present discount against the future price. This two-handed
trade was time consuming and soon there arose a class of merchants, who were trading grain
debt instead of grain.

TRADITIONAL APPROACH
Merchant Banking, as the term has evolved in Europe from the 18th century to today, pertained
to an individual or a banking house whose primary function was to facilitate the business process
between a product and the nancial requirements for its development. Merchant banking services
span from the earliest negotiations from a transaction to its actual consummation between buyer
and seller. In particular, the merchant banker acted as a capital sources whose primary activity
was directed towards a commodity trader/cargo owner who was involved in the buying, selling,
and shipping of goods. The role of the merchant banker, who had the expertise to understand a
particular transaction, was to arrange the necessary capital and ensure that the transaction would
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ultimately produce "collectable" prots. Often, the merchant banker also became involved in the
actual negotiations between a buyer and seller in a transaction.

MODERN APPROACH

During the 20th century, however, European merchant banks expanded their services. They
became increasingly involved in the actual running of the business for which the transaction was
conducted. Today, merchant banks actually own and run businesses for their own account, and
that of others.
Since the 18th century, the term merchant banker has, therefore, been considerably broadened to
include a composite of modern day skills. These skills include those inherent in an entrepreneur,
a management advisor, a commercial and/or investment banker plus that of a transaction broker.
Today a merchant banker is who has the ability to merchandise -- that is, create or expands a
need -- and fulll capital requirements. In many ways the modern European merchant bank
reects the early activities and breadth of services of the colonial trading companies.
Most companies that come to a U.S. merchant bank are looking to increase their nancial
stability or satisfy a particular immediate capital need.
Professional merchant bankers must have:
1) An understanding of the product, its industry and operational management;
2) An ability to raise capital which might or might not be ones own (originally merchant bankers
supplied their own capital and thereby took an equity interest in the transaction);
3) And most importantly, effective skills in concluding a transaction - the actual sale of the
product and the collection of prot. Some people might question Whether or not there are many
individuals or organizations that have the abilities to fulll all three areas of expertise.

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OBJECTIVES OF MERCHANT BANKERS

Merchant bankers render their specialized assistance in achieving the main objectives which are
presented below:

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, rm, trust
person, government, municipality, civil body, public authority established in India.
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.
Merchant bankers another objective is to set up and provide services for the venture
capital technology funds.
They also provide services to the nance housing schemes for the construction of houses
and buying of land.
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.
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.

SCOPE FOR GROWTH IN INDIA

As planning and industrial policy of the country envisaged the setting of up of new industries and
technology, greater nancial sophistication and nancial services are required. There is a well
proven link between economic growth and nancial technology.
Economic development requires specialist nancial skills: savings banks to marshal individual
savings; nance companies for consumer lending and mortgage nance; insurance companies for
life and property cover; agricultural banks for rural development; and a range of specialized
government or government sponsored institutions. As new units have been set up and business is
expanding, they require additional nancial services. A public equity or debt issue is the logical
source of fund in this situation and merchant banks can tap this opportunity of growth.
The areas of great scope could be
Growth of Primary market: If the primary market grows and number of issues increases, the
scope of merchant banking will be enhanced.
Entry of Foreign Investors: Now India capital market directly taps foreign capital through euro
issues. FDI is increased in capital market so Merchant bankers are required to advise them for
their investment in India. The increasing number of joint ventures also requires expert services of
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Merchant Bankers. If more and more NRIs participate in capital market, there will be great
demand for merchant banker services.
Changing policy of Financial Institutions: Now the lending policies of nancial institutions are
based on project orientation, so the merchant banker services will be needed by corporate
enterprise to provide expert guidance.
Development of debt markets: If the debt market is enhanced, there will be tremendous scope
for Merchant bankers. Now NSE and OTCEI are planned to raise their fund through debt
instruments.
Corporate restructuring: Due to liberalization and globalization Companies are facing lot of
competition. In order to compete, they have to go for restructuring, merger, acquisitions or
disinvestments. They may offer good opportunities to merchant bankers.
The scope could be extended to:1. Advising the company on designing of its Capital Structure.
2. Advising the company on the instrument to be offered to the public.
3. Pricing of the instrument.
4. Advising the company on Legal/ regulatory matters and interaction with SEBI/ ROC/ Stock
5. Exchanges and other regulatory authorities.
6. Assisting the company in marketing the issue.
7. In channelizing the nancial surplus of the general public into productive investment avenues.
8. To coordinate the activities of various intermediaries to the share issue such as the registrar,
Bankers, advertising agency, printers, underwriters, brokers etc.
THE FACTORS ON WHICH GROWTH OF MERCHANT BANKING DEPENDS:

Planning and industrial policy of the country i.e. India in this case.
Prevailing Economic condition of the country.
Regulatory system of the market and economy prevailing in India.
Condence of the people, traders, buyers, marketers, business houses, nancial
institutions etc.
The economic environment of the outside World.
Competition among the existing players and the upcoming entrants.

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MERCHANT BANKING IN INDIA

Merchant Banking Divisions

Foreign
Banks

Indian
Banks

Financial
Institutions

Private
Merchant
Bankers

In India Merchant Banking activities started from the year 1967, following the footsteps of
similar activities in UK & USA. Currently Merchant Banking activity has mushroomed in the
Indian capital market with both public & private sector settings up their respective merchant
Banking divisions. Currently, the total no. of merchant bankers in India are approx. 1450 with
more than 930 registered with SEBI. The SEBI authorized Merchant Bankers Include merchant
Banking divisions of All India Financial Institutions, nationalized & foreign banks, subsidies of
the commercial banks, private merchant banks engaged in stock broking, underwriting activities
& nancial consultancy & investment advisory service rms.
Grindlays Banks - 1967
Citi banks - 1970
SBI - 1973
ICICI - 1974

An overview
Companies raise capital by issuing securities in the market. Merchant bankers act as
intermediaries between the issuers of capital and the ultimate investors who purchase these
securities.
Merchant banking is the nancial intermediation that matches the entities that need capital and
those that have capital. It is a function that facilitates the flow of capital in the market.
Merchant banker registered with SEBI:
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Public Sector: - Commercial banks (24), Financial Institutions (6), State

Institutions (4)
Private sector: - International bankers (I0), Banks (l0), nance & investment (231)

DEVELOPMENTS IN MERCHANT BANKING

ESTABLISHMENTS IN INDIA
Setting up of banks Subsidiaries:
In order to meet the growing demand for broad-based nancial services from the Corporate
sector more effectively, the merchant banking division of the nationalize banks have stated
forming independent subsidiaries. These subsidiaries offer more specialized services with
professional expertise & skills. SBI capital market ltd. Was incorporated as the first such
subsidiary of SBI on 2 July, 1986. Then CAN BANK nancial services ltd was set up as wholly
owned subsidiary of Canara bank in 1987. PNB Capital Market was promoted by PNB during
mid 1988. Many more subsidiaries are being set up by another nationalize banks.
Reorganisation of private Firms:
Expecting tough Competition from growing number of merchant banking subsidiary of
nationalised banks, private merchant bankers have also started reorganising their activities e. g., J
.M nancial & investment consultancy ltd., 20th century nance corporation ltd., LKP merchant
nancing ltd are some of the private sector rms of merchant bankers who have taken steps to
reorganise their activities.
Establishment of SUA:
In order to educate and protect the interest of investor , to provide information about new issues
of capital market, to evolve a code of conduct for underwriters & to render legal & other services
to members & public, the STOCKBROKER UNDERWRITER ASSOCIATION(SUA) was
established in 1984
Discount & Finance House of India(DFHI)
DFHI Was incorporated as a company under the company act 1956 with an authorized & paid up
capital of Rs 100 crores. Out of this Rs 51 crores has been contributed by RBI, Rs 16 crores by
nancial intuitions & 33 crores by public sector banks. It would also have line of credit from
public sector banks; renance facility from the RBI in order to meet the Working capital
requirement. DFHI aims at providing liquidity in money market as it deals mainly in commercial
bills.
Credit Rating Information Services of India Ltd.(CRISIL)
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CRISIL has been set up in I987 to provide help to investors, merchant bankers, underwriters,
brokers, banks & nancial institutions etc. CRISIL rates various types of instruments such as
debt, Equity, & Fixed return security offered to the public. It help the investor in taking
investment decisions.
Stock-Holding Corporation of India Ltd. (SHC)
SHC was set up in 1986 by the all Indian nancial institutions to take care of safe custody,
delivery of shares & collection of sale proceeds of the securities.

ROLE OF MERCHANT BANKER

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.

REQUIREMENTS FOR SETTING UP A MERCHANT BANKING

OUTFIT
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l. Formation of the Business Organization:SEBI act, 1992 does not prescribe any specic form of business organization to carry on the
activities as merchant banker. However, the types of organizations are listed below:
Sole proprietorship
Partnership rm
Hindu Undivided Family (HUF)
Corporate Enterprises
Co-operative Society

Generally it is preferred that the Merchant Banking outt 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 nd out whether the business to be undertaken is viable or not are
also applicable to a Merchant Banking setup. Capital adequacy, protability, growth
opportunities and current market size are some of the factors which need to be looked into.
3. Registration of Merchant Bankers: Application for grant of certicate

An application for grant of a certicate 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 nancial structure, tie-up
of nanciers and nal 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.
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To carry on the activity as underwriter or portfolio manager a separate certicate of registration

needs to be obtained from SEBI.
Application to conform to the requirements

The application should conform to all the requirements under the SEBI guidelines, otherwise it
may be rejected.
Furnishing of information, clarication and personal representation

The Board may require the applicant to furnish further information or clarication regarding
matters relevant to the activity of a merchant banker for the purpose of disposal of the
application. The applicant or its principal ofcer may appear before the Board for personal
representation.
Consideration of application

The Board shall take into account for considering the grant of a certicate, 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 nancial
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
The applicant has the necessary infrastructure like adequate ofce 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 fullls 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 net worth shall be as follows,
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Category

Minimum Amount

Category I

5,00,00,000

Category II

50,00,000

Category III

20,00,000

Category IV

NIL

The applicant, his partner, director or principal ofcer 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
The applicant has the professional qualication from an institution recognized by the
Government in nance, law or business management
Grant of certicate to the applicant is in the interest of investors.
Procedure for Registration

The Board on being satised that the applicant is eligible shall grant a certicate. On the grant of
a certicate the applicant shall be liable to pay the fees as prescribed.
Payment of fees and the consequences of failure to pay fees

Every applicant eligible for grant of a certicate shall pay such fees in such manner and within
the period specied.
Where a merchant banker fails to pay the Annual fees as provided in Schedule II, the Board may
suspend the registration certicate, 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 Certicate of
Registration from the SEBI after completion of the above mentioned formalities.

GUIDELINES OF SEBI

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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 rst issue by a new or the rst
issue of a new company set up by the existing company, the rst 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.
The SEBI has announced the new guidelines for the disclosures by the Companies leading
to the investor protection. They are presented below:

If any Companys other income exceeds 10 per cent of the total income, the details
should be disclosed.

The Company should disclose any adverse situation which affects the operations of the
Company and occurs within one year prior to the date ling of the offer document with
the Registrar of Companies or Stock Exchange.
The Company should also disclose the information regarding the capacity utilization of
the plant for the last 3 years.
The Promoters of the Company must maintain their holding at least at 20 percent of the
expanded capital.
The minimum application money payable should not be less than 25 per cent of the issue
price.
The company should disclose the time normally taken for the disposal of various types of
investors grievances.

The Company can make rm allotments in public issues as follows:

Indian mutual funds (20%)

FIIS (24%)
Regular employees of the company (10%)
Financial institution (20%).

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

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shares per allottee and the offer should be valid for a period of at least 6 months from the
date of dispatch of securities.
According to the guidelines, in case of the public issues, at least 30 mandatory collection
centers should be established.
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.
The Company should also disclose about the fee agreed between the lead managers and
the Company in the memorandum of understanding.

INVESTMENT BANKS V/S MERCHANT BANKS

INVESTMENT BANKING
Both fee-based and fund-based.

Commit their own funds

MERCHANT BANKING
Purely fee-based.
Impossible to stay aloof from international trends.

MERCHANT BANKS V/ S COMMERCIAL BANK

COMMERCIAL BANKING
Deals with Debt & Debt related nance.
Asset oriented.
Generally avoid risks.

MERCHANT BANKING
Deals with Equity & Equity related nance.
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Management oriented.
Willing to accept risks.

FUNCTIONS OF MERCHANT BANKERS

Consulting advice on going public and international business.
Advice and help in taking your company public. If they are unwilling to supply
Investment
Banking bridge loans, they have a low cost strategy for taking your company public.
They do PIPE (Private Investment in Public Equities) nancings.
They can advise or help with a companys M&A strategy.
They are essential advisors for companies seeking to become multinational corporations

Corporate Counseling

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Corporate counseling covers the entire eld of merchant banking activities viz. project
counseling, capital restructuring, public issue management, loan syndication, Working capital,
xed deposit, lease nancing acceptance credit, etc. Merchant bankers also offer customized
solutions to their clients nancial problems.
Project Counseling

Project counseling includes preparation of project reports, de ciding upon the nancing pattern to
nance the cost of the project and appraising the project report with the nancial institutions or
banks. It also includes lling up of application forms with relevant information for obtaining
funds from nancial Institutions and obtaining government approval.
Credit Syndication
Merchant bankers arrange to tie up loans for their clients. This takes place in a series of steps.
Firstly they analyses the pattern of the clients cash ows, based on which the terms of
borrowings can be dened. Then the merchant banker prepares a detailed loan memorandum,
which is circulated to various banks and nancial institutions and they are invited to participate
in the syndicate.
Issue Management and Underwriting

Management of issue involves marketing of corporate securities viz. equity shares, preference
shares and debentures or bonds by offering them to public. Merchant banks act as an
intermediary whose main job is to transfer capital from those who own it to those who need it.
After taking action as per SEBI guidelines, the merchant banker arranges a meeting with
company representatives and advertising agents to nalize arrangements relating to date of
opening and closing of issue, registration of prospectus, launching publicity campaign and xing
date of board meeting to approve and sign prospectus and pass the necessary resolutions. Pricing
of issues is done by the companies in consultant with the merchant bankers.
Under writing of public issue

Underwriting is a guarantee given by the underwriter that in the event of under subscription, the
amount underwritten would be subscribed by him.
Banks/Merchant banking subsidiaries cannot underwrite more than 15% of any issue.
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

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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

Portfolio refers to investment in different kinds of securities such as shares, debentures or bonds
issued by different companies and government securities.
Portfolio management refers to maintaining proper combinations of securities in a manner that
they give maximum return with minimum risk.
Advisory Services Relating To Mergers and Takeovers

A merger is dened as a combination of two or more companies into a single company where
one services and other loses their corporate existence. A merger is also deed as an
amalgamation wherein the shareholders of the combining companies become substantially the
shareholders of the company formed.
A takeover is referred to as an acquisition, which is the purchase, by one company
of a controlling interest in the share capital of another existing company.
Merchant bankers are the middlemen settling negotiations between the offered and the offeror.
Their role is specic and specialized in handling the mergers and taker over assignments. Being a
professional expert, the merchant banker is apt to safeguard the interest of the shareholders in
both the companies and as such his assistance is useful for both the companies, i.e. the acquirer
as well as the acquired company.
Based on the purpose of business objective, the search of the acquirer company will start for a
merger partner company. If the objective of merger is growth oriented i.e. seeking expansion in
production and market segments, utilization of existing companies or optimum utilization of
resources, then the acquirer company will select a business related company as a merger partner.
If the objective is diversication in production line or business activities, then it
will select a non-related company as a merger partner.
Once the merger partner is proposed the merchant banker has to appraise the merger/takeover
proposal with respect to nancial viability and technical feasibility. He has to negotiate with the
parties and decide the purchase consideration and mode of payment. He has to comply with the
legal formalities like getting approval from the Government/ RBI; drafting the scheme of
amalgamation; getting approval of company Board, nancial institution, high court if required;
arranging for the meeting etc.

Venture Capital Financing

Financing an emerging high-risk project is called venture capital nancing. Many merchant
bankers are entering into this area by also nancing viable upcoming projects. The nancing is
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by subscription to the equity capital, while repayment is by selling the equity through stock
market when the shares are listed.
Leasing

Leasing is a viable source of nancing while acquiring capital assets. The services
include arrangement for lease nance facilities for leasing companies, legal; documents
and tax consultancy.

Non Resident Investment

To attract NRI investments in the primary and secondary markets, the merchant bankers provide
investment advisory services to the NRIs in terms of identication of investment opportunities,
selection of securities, portfolio management, etc. they also take care of operational details like
purchase and sale of securities securing the necessary clearance from RBI under FERA for
repatriation of dividends and interest, etc.
Acceptance Credit and Bill Discounting

Though merchant bankers World over specialize in acceptance credit and bill discounting, these
services are not currently provided by merchant bankers in India the principal reasoning being
the lack of an active market for commercial bills.
Arranging Offshore Finance

The merchant bankers help their clients in the following areas involving foreign currency.
(a) Long term foreign currency loans
(b) Joint Ventures abroad
(c) Financing exports and imports
(d) Foreign collaboration arrangements
Management of Fixed Deposits of Companies

Recently, merchants bankers have begun to structure and mobilize xed deposits for their
corporate clients. They take care of the procedural and legal aspects, and also manage the
collection and subsequent servicing of the deposits. Advice with regard to the amount to be
raised, interest charges, terms of deposits and other related issues are also offered to the client.
Relief to Sick Industries

The services offered by merchant bankers to sick industries can be summarized as follows:

Assessment of capital requirements and counseling on capital restructuring;

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 Appraisal of technological, environmental, nancial and other factors causing sickness;

Preparations of programs and packages for rehabilitation of sick units;
Providing necessary assistance where the rehabilitation package involves mergers or
amalgamation;
Obtaining necessary approval for implementation the rehabilitation package from the
statutory authorities;
Monitoring the implementation of the scheme of rehabilitation.

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STATEMENT OF PROBLEMS

Restriction of merchant banking activities

SEBI guidelines have authorized merchant bankers to undertake is sue related activities and
made them restrict their activities or think of separating these activities from present one and
oat ne W subsidiary and enlarge the scope of its activities.

Minimum net worth of Rs.1 crore

SEBI guidelines stipulate that a minimum net worth of Rs .1 crore for authorization of merchant
bankers.

Non co-operation of issuing companies

Non co-operation of the issuing companies in timely allotment of securities and refund of
application money is another problem faced by merchant bankers.

Merchant Bankers Commission

Maximum: - 0.5%
Project appraisal fees
Lead Manager:- 0.5% up to Rs.25 crores
- 0.2% more in excess of Rs.25 crores
Underwriting fees
Brokerage commission:- 1.5%
Other expenses:

Advertising

Printing

Registrars expenses

Stamp duty

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In spite of problems popping up, merchant banking in India has vast scope to develop because
of lot of domestic as well as foreign businesses booming here. Indian economy provides an
amicable environment for these rms to set up, ourish and expand here.

OBJECTIVE OF THE STUDY

To develop the ability to study the functioning of Merchant Banking in India & learn &
apply multidisciplinary concepts, tools & techniques to solve vital problems.

To familiarize with the various services provided by Merchant Bankers.

To compare the public & Private Sector Company engaged in pro viding merchant
banking services on various grounds.

To nd out the growth potential of the Merchant Banking public & private sector
companies.

SCOPE OF STUDY
The main focus of the study would be on functioning of the Merchant Banking companies. The
study would have information and details of Merchant Banking of public sector and private
sector companies and then an analysis will be done on the collected information and nally a
comparison between these two categories will be done. After comparison it would be nd out
which category has more growth potential in present scenario as well as in future midst the swift
changes sweeping the nancial world, Merchant Banking has emerged as an indispensable
nancial advisory package. Merchant banking is a service-oriented function that transfers capital
from those who own to those who can use it. They try to identify the needs of the investors &
corporate sector & advice entrepreneurs what to do to be successful. New players are entering in
this eld day by day. Merchant Banking in India has a great demand over the globe. So many

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companies in India are trying their hands in this eld. Some companies have built their strong
image and some are still in process to leave their mark in the international market.

SIGNIFICANCE OF STUDY

It would help us to develop the ability to study the functioning of Merchant Banking in
India & learn & apply multidisciplinary concepts, tools & techniques to solve vital
problems.

It familiarizes with the various services provided by Merchant Bankers.

They would help us to draw comparison between public & private sector companies
engaged in Merchant Banking activities.

Based upon the comparison, it would help us to determine which sector has more growth
potential & Where should one invest his/her funds to maximize the return at minimum
risk

LIMITATIONS OF STUDY

Due to paucity of time only limited information can be collected.

There can be a possibility of individual biasness on the part of respondents.

Study would be conned to only 10 public & private sector merchant banking companies.

Sample size to be taken may not be the true representative of the population.

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CASE STUDIES

SBI Merchant Banking Group is strongly positioned to offer perfect nancial solutions to your
business. We specialize in the arrangement of various forms of Foreign Currency Credits for
Corporate.
State Bank of India is the nation's largest bank. Tracing its roots back some 200 years to the
British East India Company (and initially established as the Bank of Calcutta in
1806), the bank operates more than 13,500 branches and over 5,000 ATMs within India, where it
also owns majority stakes in seven associate banks. State Bank of India has more than 50 ofces
in nearly 35 other countries, including multiple locations in the U S (California), Canada, and
Nigeria. The bank has other units devoted to capital markets, fund management, factoring and
commercial services, and brokerage services. The Reserve Bank of India owns about 60% of
State Bank of India.
We provide the resources, convenience and services to meet your needs by arranging Foreign
Currency credits through:

Commercial loans
Syndicated loans
Lines of Credit from Foreign Banks and Financial Institutions
FCNR loans
Loans from Export Credit Agencies
Financing of Imports

We are internationally the most Preferred Bank by Export Credit Agencies for Guarantees in
case of the Indian Clients or Projects. SBI being an Indian entity has no India exposure ceiling.
Our Primary focus is On Indian Clients. SBIs seasoned Team of professionals provides you with
Insightful credit Information and helps you Maximize the Value from the transaction.

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OUR PRODUCTS AND SERVICES

1] Arranging External Commercial Borrowings (ECB)
2] Arranging and participating in international loan syndication
3] Loans backed by Export Credit Agencies
4] Foreign currency loans under the FCNR (B) scheme
5] Import Finance for Indian corporate

Employees: 41,871
Employee growth: 37.2%
You see, ICICI Bank is Indias #2 bank (after State Bank of India), with more than 600 branches
and 2,200 ATMs nationwide. ICICI's retail banking group offers lending and deposit services to
small businesses and individuals. Larger businesses are served by the corporate banking group,
which offers nance services and treasury products. lClCIs rural and government banking unit
offers micro-loans and agricultural banking. Foreign operations, as Well as services related to
international trade nance and expatriate Indians, fall under the international banking group.
Other ICICI offerings include online banking, asset management, and insurance.
ICICI Security is a SEBI Registered CAT-l Merchant banker.
Key numbers for scal year ending March, 2009:
Sale: $5,796.3M
One year growth: 99.1%
Net income: $524.lM
Income growth: 167.4%
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ICICI Advice on Wide Varity of Product:

1 Private Equity Financing
2 Secondary sale transactions
3 Pre IPO deals

Punjab National Bank (PNB) is one of Indias largest nationalized banks with so me 4,500
branches or service counters. The nancial institution offers services in personal and corporate
banking, including industrial, agricultural, and export nance, as Well as international banking.
Its personal lending services include loans for housing, autos, and education. PNBs diverse
client list includes Indian conglomerates, small and mid-sized businesses, non-resident Indians,
and multinational companies. The bank was established in Lahore in 1895 -- before the country
was partitioned into India and Pakistan in 1947.
Key numbers for scal year ending 2009:
Sale: $2,315.0M
Net income: $322.lM
PNB's Financial Numbers:
- Sales $2.32 bil
- Prots $.28 bil
- Assets $24.12 bil
. Market Value $2.79 bil
- Employees 58,300

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Appraisal & Merchant Banking

Bank of Baroda provides its assistance to corporate customers to assess the value of their
holdings, in syndicating loans and in consultations for Merchant Banking.
Appraisal:
Bank of Baroda carries out credit and merchant appraisals of all types of business ventures
including infrastructures projects by our specialized team of ofcials at a reasonable cost.
Loan Syndication:
The bank also assists in loan syndication for all kinds of business ventures when a tie-Up of
business sources is required.
Other Consultations:
Our team is highly capable of advising on parameters of feasibility of an existing proposed
project and suggests measures, if required, for improvement of the business enterprise.

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Union Bank of India has been around for more than 85 years. The bank has earned a reputation
for being techno-savvy--more than 600 branches of Bank are networked and powered with a
centralized technology platform, the ban k also manages close to 350 networked ATMs. Union
Bank of India offers Online Tele banking services to individual and corporate customers as well.
In addition to regular banking offerings and loans (including loans for education, home, health,
and agribusiness), it also provides cash management, insurance, and mutual fund services. The
government of India owns more than 60% of the institution

Indias premier Investment bank and subsidiary of kotak Mahindra bank.

Reconstruction from a private company to a public limited company effective from June l3,
2003. Act as a lead manager to several (IPOs) & help in Client in accessing the public & private
equity market.
KIB provide high Quality Advisory services encompassing the following business area of
operations.

Merger & Acquisition advisory

Raising capital from debt & Equity capital market
Raising Capital from nancial sponsor.
Infrastructure nancing advisory.

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Objective: Offer a Wide suite of capital market & advisory solution to client covering leading
domestic & multinational cooperation, banks, nancial institutions, & govt. companies across
major industry sector.
Awards: The Best Investment bank in India By nance Asia for 2008, 2007 & 2006.
The Best equity House in India by Asia money in 2008.

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REVIEW OF LITERATURE
A number of studies have been conducted from time to time to understand the different aspects
relating to primary market and merchant banking activities in India. However, most of them have
focused upon the primary market in India only. Research in the area of merchant banking in
India and its role in the primary market is very limited and that too is descriptive in nature and
deals with procedural aspects, organization and management and marketing aspects of merchant
bankers. A review of important studies is presented below:
Literature Survey
Verma (1990)1 conducted research on merchant banks in India with the purpose to analyse their
organization structure and management pattern and to assess their suitability for medium and
small size corporate and non-corporate enterprises. The suitability of merchant banking services
in reducing investors risk and corporate capital structure has also been examined. The
information was collected from a sample of 32 merchant bankers through questionnaire and the
study covered the period 1978 to 1984. The researcher found a number of weaknesses in the
existing divisional form organization and management pattern of merchant banks in India. This
included deep concentration of decision making power, lack of co-ordination, lack of appropriate
skill, inadequate training program, strict dependence on the bureaucratic framework, blocked
communication channels and misdirected accountability. The study revealed that 90 percent of
the resources of all merchant banks were devoted only to the management of public issues. A
negligible performance of merchant banks was found in other areas of services including loan
syndication, merger and amalgamation; inter corporate investments and corporate counseling.
Further, merchant banking activities were found to have remained concentrated with only a few
top merchant bankers, while stock brokers managed very small sized issues covering just 15% of
the total amount of public issues. A good public response was found to the issues managed by
category I merchant bankers including merchant bankers of public sector banks, whereas the
category II merchant bankers which included private firms had the public response of second
order. The researcher highlighted the merchant banks contribution in causing risk reduction both
to investors (through portfolio management) as well as the industry (through project counseling
and corporate counseling). Empirical results also highlighted that corporate enterprises which
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sought merchant bankers assistance were financially sounder and less prone to sickness as
compared to those not assisted by the merchant banks.
Murthy (1993)2 in his paper examined the cost of raising capital from the public issues floated
during 1992-93. During 1992-93, an amount of Rs. 4677.74 crore was raised through 514 public
issues. The estimated expenses on these issues were Rs. 473 crore. Analysis of 506 public issues
showed that issue expenditure as percentage of net public offer was 10.10% and the proportion
of issue expenses declined with the increase in offer size. The study found that smaller projects
tend to spend a higher proportion as issue expenditure compared to the larger ones. The
researcher also compared the cost of raising capital of issues through the OTC (over the counter)
route and regular stock exchange option and found that the cost of raising capital through OTC
route was lower than the issues that opted for regular stock exchange route.
The study pointed out that no uniform format existed for reporting the issue expenditure in the
prospectus. The researcher has suggested that the total issue expenditure as percentage to the
total issue amount be reported prominently in the prospectus and abridged prospectus cum
application form.
Shah (1995)3 conducted an empirical study on the data set of 2056 Indian IPOs listed on the
BSE from January 1991 to May 1995 with the objective to examine the under pricing of IPOs
and to establish the empirical regularities about Indias IPO market. He examined six factors
underlying underpricing, namely asymmetric information between firms and investors, fixing the
offer price too early, the interest rate float, loss of liquidity on the amount paid at issue date
(liquidity premium), building loyal shareholders and merchant bankers rewarding favoured
clients as an incentive to underprice. Empirical study found that the average price on first listing
day was 105.6% above the offer size, average delay between issue dates and listing day was 11
weeks
36 and weekly excess return on market index (BSE Sensex) was 3.8%. The study further found
that correlation between the volume of IPOs under pricing and the return on BSE Sensex was
positive, under pricing among the smaller issues was high, average long run trading frequency of
IPO was lower than A group companies and return on IPOs during the first 200 trading days
was more than market return.
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Srivastava (1995)4 in his paper highlighted the need for efficient marketing of public issues
because of the transformation of new issue market from sellers market to buyer dominated
market as the geographical and demographical range of investors has widened. According to
him, the process of public issue marketing starts with the selection of the issue by the merchant
banker. Then the merchant banker plays the role of a guide for the appointment of underwriters,
brokers and an expert advertising agency. The researcher has listed the current practices in public
issue marketing which include the application of data base marketing research, direct approach to
investors ( like insurance, UTI ), seeking services of marketing experts as issue specialists,
branding the issues like mutual funds, and effective advertising through extensive and intensive
use of media. The author concluded that the future dimensions of public issue marketing will
include the after sale service to investors and giving instant services of selling.
Aggarwal (1995)5 traced the origin, growth and history of merchant banking in India and
abroad. The objectives of the study included the analysis of organizational structure,
management pattern and performance evaluation of SEBI registered category I merchant bankers
during the period 1989- 90 to 1993-94.
The study found that merchant banking institutions lack skill development programmes for
training the staff, up to date information and more concentration of decision making power.
Despite this, the study highlighted the important role of merchant bankers in the growth of
capital market and mobilization of resources from public through issue management activities.
The author recommended for stopping the turnover of personnel in merchant banking divisions
of nationalized banks due to transfers, who have up to date market information and adopt
professional attitude for providing services as merchant bankers.
Narta (1996)6 conducted a research study to find out the growth of new issue market and
underwriting of capital issues in India, and to analyse the cost of raising capital during the period
1970-71 to 1988-89. The study was based on the secondary data.
The researcher found that after independence, a large number of public financial institutions,
investment institutions, merchant banking divisions of commercial banks and investment
consultancy agencies were engaged in the underwriting operations of capital issues in India.

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The researcher found that public financial institutions accounted for a larger proportion in
underwriting activities though their share declined from 63% in 1970- 71 to 22.64 % in 1986-87.
The commercial banks showed an increase in underwriting activities on account of opening of
merchant banking divisions. Development banks and GIC were found to prefer participation in
the underwriting of large issues. Stock brokers were more active in underwriting during boom
conditions while commercial banks were more selective to underwrite the issues of their valued
customers. The average cost of public issues during the period of study was found to be ranging
from 8% to 10% of the amount offered to public. However, the cost of issues of existing
companies was higher as compared to IPOs because of aggressive campaign for over
subscription. The suggestions by the researcher included opening of more merchant banking
divisions by commercial banks, joint underwriting, single window agency in new issue market
and priority to the underwriting of small issues by public financial institutions.
Kailani (1998)7 in her research work examined the marketing strategies and performance of
merchant bankers during the period 1990-91 to 1997-98. The study was based upon 77 merchant
bankers. The researcher evaluated the performance of merchant bankers by taking into account
of both qualitative and quantitative dimensions. While qualitative factors included skill in issue
management and quality of personnel and services to the clients, the quantitative factors included
number and amount of public issue handled and the activity profile of merchant bankers (fund
based or non fund based). The variables taken for quantitative evaluation included projected and
actual sales, profit before interest, depreciation and taxes, profit after tax and earnings per share.
The study found that the role of merchant bankers had become more diverse after the setting up
of SEBI. Post liberalization era up to 1995 saw a number of small financial companies entering
into merchant banking business because of low entry barriers. Consequently, bad quality issues
were sold in large numbers. Further, high concentration of merchant banking business was found
among the top ten merchant bankers and only six merchant bankers provided all the post issue
services. The author recommended for fixing the responsibility for fulfillment of promises made
in the prospectus, improving the quality of disclosures in IPOs, need for grading the prospectus,
mandatory participation of merchant bankers in the project and rating of merchant bankers.

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Qumar (1998)8 analyzed the non fund based financial services by the leading public sector
banks (PSBs) in the field of merchant banking for the period 1993-94 to 1997- 98. According to
the author, the public sector banks entered in merchant banking business on the
recommendations of Banking Commission 1972 and dilution of foreign equity of large number
of foreign companies operating in India. He analyzed the role played by public sector banks in
handling the number and amount of issues as lead manager, co manager, underwriter, adviser,
banker to issue and the project appraiser.
The author concluded that there should be reforms in the existing legal system relating to
financial services of PSBs, as frequent changes in guidelines had adversely affected the financial
services of PSBs. The author pointed out that limited range of merchant banking activities,
inferior quality of services and lack of trained and skilled personnel were the reasons for
declining trend in the merchant banking business with public sector banks and suggested a close
touch with the economy and developments in capital market and more competitive and technical
bank officers for improvement in the merchant banking services by banks.
Mohiadeen (1999)9 conducted research on the topic A study on New Issue Management
Services of Lead Merchant Bankers in India. The objectives of the study included identifying
the functional activities of issue management and to assess the functioning of the merchant
bankers in the pre and post issue management phases.
The study covered the period from the year 1992-93 to 1996-97 and was based on both primary
and secondary data. The primary data was collected from a sample of 26 lead merchant bankers a
questionnaire. The study found that all private merchant bankers depended on the services of the
brokers, sub brokers and underwriters for the success of the issue but merchant banks of private
and public sector banks did not depend on them. The merchant banks of nationalized banks and
financial institutions had been rather concentrating only on specific industries. Promoters track
record, company fundamentals, industry type and EPS were the important factors in pricing the
public issues. The market support of brokers was found to be inadequate. Collecting bankers to
the issue were found to have acquired the applications money even after closure of the issue. The
performance of the group lead merchant bankers who had handled the issues did not differ
significantly from those who had handled the issues individually. Lead merchant bankers opined
that actual public issue cost had been more than the cost mentioned in the offer document. The
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correlation of issue price and market price in the case of public sector merchant bankers was
found to be highly positive, but negative in case of public issues managed by private sector
merchant bankers. The researcher recommended that the merchant bankers should develop a
large public investors base for the development of equity culture in India and that there was a
need for reduction in the number of merchant bankers in the industry.
Guner (1999)10 in his paper analyzed the relationship between underwriter (lead manager)s
reputation and IPO underpricing in the Istanbul Stock Exchange (ISE) in Turkey. The authors
attempted to compare the findings of various studies on US market that the IPOs managed by
prestigious underwriters resulted in lower amount of underpricing in short period, with that of
emerging markets. The sample for the analysis consisted of 180 IPOs that took place at ISE
during the period from 1993 to June 1999. The study used both traditional and extended model
for establishing the relationship based on the given characteristics of the IPO.
The application of the traditional model on the IPOs in Turkey found no relationship between
initial day IPOs returns and the underwriter reputation regardless of which reputation measure is
used. However, a positive relation was found between the initial day IPO returns and 15 day
return on the market index before the first day of trading. However, after controlling the factors
that are important in determining the price of an IPO in an emerging market, a complex
relationship between underwriter reputation measures and IPO returns was documented in the
study. In the extended model also, the study found a negative relationship between the IPOs
return and the underwriter reputation because these underwriters were well known to the
investors. The researcher further found a positive relationship between the volume of IPOs
handled by a particular underwriter and the initial day IPO return. The variables having
significant positive impact on the IPO underpricing in Turkey were found to be the age of the
issuing company and the relations of the IPO firm and the underwriter. When underwriter was
not related to the IPO firm, investors had a greater confidence in the certification of the IPO
price. The researcher concluded that the underwriter reputation and the initial day return findings
in USA markets should not be extended to emerging markets without any modification.
Anand (2002)11 and others in their research paper studied the long term relationship between
business firms and investment banks with the premise that it leads to better allocation of
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resources in the economy. The objective of the paper was to study the conditions that must be
met for sustaining relationships between the investment banking and the security market. The
paper stated that the investment banking structure was determined by the technology of
relationships. The author developed a model of this relationship with the assumption that
investment bank must incur a sunk cost to establish this relationship. The author also discussed
the policy implications to develop this relationship as the size-distribution of business firm
depended heavily on the structural characteristics of the economy. While policy can probably
remove obstacles that increase the cost of relationships, the size distribution of business firms
determined whether an investment banking industry was feasible: it will not emerge if large
firms are few.
Joint Parliament Committee (2002)12 which was set up to look into the manipulation and
irregularities in the securities market, as a result of Ketan Parekh scam, submitted its Action
Taken Report (ATR) on December 19, 2002. The JPC has made 276 observations/ conclusions/
recommendations. Each of the observation has been listed in the report along with the response
of the Government. The Committee in its report held the stock exchange authorities, SEBI, RBI,
Department of company Affairs (DCA) and Finance Ministry responsible for the stock market
scam. The report criticized SEBI for its failure to monitor and regulate the securities market, for
its lack of action in case of mismatch between movements in the primary and secondary market,
the absence of regulatory framework for the private placement to the detriment of the primary
market and negligence in checking whether bull operators obtained bank funds to finance their
market operations. SEBIs track record of punishing wrong doers was found unsatisfactory by
the JPC. The report also termed RBIs supervision as weak and inefficient. RBI was found to
have failed in taking timely action in preventing diversion of funds from the country and
checking the irregularities in the functioning of certain banks for providing undue advances for
security market transactions. The Finance Ministry was criticized for not keeping a watchful eye
on the UTI that resulted into a crisis in its famous scheme US-64.
With regard to primary market, the report further pointed out that pricing and tracking the end
use of funds was totally neglected by SEBI. The report pointed out that pricing of securities in
primary market was a difficult task and leaving this issue entirely to the discretion of
management, based on the recommendations of the merchant bankers, did not serve the interests
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of small investors. The Committee gave a number of recommendations like speeding up of the
process of demutualization and corporatization of stock exchanges to implement the decision to
separate ownership, management and operations of stock exchanges; affecting legislative
changes for investors protection and enhancing the effectiveness of SEBI as a capital market
regulator.
Kenourgios (2002)13 in his research paper analyzed the initial performance of Greek IPOs and
studied the relationship of underpricing with the underwriters reputation and oversubscription.
The data for the study related to 169 IPOs listed on Athens (Greek) stock exchange (ASE) over
the period 1997-2002. The initial performance of the IPOs was measured by raw returns and the
excess or adjusted returns on the first, fifth and 21st day respectively.
The study found a high average percentage of raw return as well as excess return from IPOs. The
average raw returns were found as 52.7%, 44.78% and 41.84% on the first, fifth and 21st day
respectively. Similarly the excess (adjusted) returns during the period were 54.28%, 45.32% and
43.83% on the first, fifth and 21st day respectively. The study further found a high positive
correlation (0.799) between the number of times of oversubscription and the first day adjusted
returns of the IPOs. On the other hand, initial excess returns of the IPOs was found as negatively
correlated with the underwriters reputation and hence supported the Beatly and Ritters
hypothesis of prestige underwriters. The downward trend in both raw and adjusted returns over
the time reported in the study was found to be consistent with the findings of other studies on the
Athens Stock Exchange. The researchers concluded that the worldwide phenomenon of
underpricing of IPOs of stock was a challenge to the efficient market hypothesis.
Gupta (2002)14 in his paper examined the performance of merchant banks in India on the basis
of their different positions (lead manager, co-manager, and adviser) and different categories of
ownership (Public, private and foreign). The researcher selected 104 working merchant bankers
out of 164 registered with SEBI and covered the period from 1997-98 to 2001-02.
The researcher concluded that the private sector merchant bankers performed well as compared
to public sector and foreign merchant banks both as regards to public issues managed and the
amount of funds rose. Although, public sector and foreign banks performed identically as regards
total number of public issues managed but the performance of foreign merchant bankers was
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better than that of the public sector banks in terms of funds raised. The author pointed out that
merchant banking was mainly restricted to the activity of issue management and other activities
such as underwriting, loan syndication, investment counseling and portfolio management were
still not much emphasized. The researchers recommendations included the need for providing
quality services, functional cum expert oriented organization and a team of specialists.
Findlay (2002)15 and others in their paper discussed some considerations involved in
implementing Customer Relation Management (CRM) in the field of investment banking. They
were of the view that increased competition and shrinking margin had forced investment banks
to rethink their fundamental approach to client management and redesign their coverage
strategies by use of information technology.
The author was of the view that investment banks must respond quickly to the pressures from
their clients to improve client management process and systems as the clients regarded
investment bankers as the core providers of services. Selecting and managing the right client
set, determining the products and services, reducing the cost of coverage and co-ordination of
multi product, multi country relations are the CRM challenges before the investment bankers.
For the implementation of CRM system, the author recommended the global understanding of
each clients situation, creation of new and sophisticated financial instruments, sharing of
qualitative and quantitative information with the clients and the feedback from the clients.
Hyderabad, R. (2002)16 in their paper attempted to study the overall performance of merchant
bankers in the area of public issue management from 1989 to 1998. The criteria for evaluating
the performance of merchant bankers included number of issues handled, average amount
handled, instrument wise performance (equity, preference shares, debentures), the number of
times the issue was oversubscribed and sector wise analysis.
The study found bank subsidiaries as the market leader in respect of number and amount of
public issues handled. Competition and professionalism in public issues management and the
dominance of private merchant bankers was noticed. The inadequate infrastructure,
inexperienced staff, unhealthy competition, tight rules and regulations by SEBI had been the
major problems of merchant bankers in India.

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The author suggested for changing yardsticks of performance in post issue management services,
widening the area of equity culture, establishment of independent training institutes, and clear
and consistent regulations for merchant bankers by SEBI for improving efficiency of merchant
banks.
Lakshmanna (2002)17 in their study aimed to analyze the functions of merchant banking and
their performance evaluation based upon a sample of merchant bankers during the period 1994 to
1999. The authors observed that the sluggishness in the primary market forced most of the
category 1 merchant bankers to withdraw from merchant banking activities and changes in rules
and regulations had also significant impact on their functioning and performance. The study also
found that most of the merchant bankers concentrated on floating the public issues function
while underwriting was secondary. The study did not find a direct correlation between number of
issues in each activity to the size and value of the issue. The authors recommended professional
approach in their working and adoption of best practices of corporate governance for improving
the performance of merchant banks.
Mallik (2002)18 in his article stated the conflicting interests in the investment banking
profession. In the primary financial service market, the investment banks operations included
raising money for companies and corporations by issuing and brokering securities and providing
advice to companies. The raising capital for companies, advising investors and trading stocks for
their proprietary trading activity often resulted in direct conflict and the merchant bankers had to
balance between all these. Sometimes the inner information acquired by an investment bank
from advisory services rendered to a company was used to help its competitors in a hostile
takeover. The author concluded that against the backdrop of inherent conflict of interests,
implementation of ethical practices was the only savior and hence the ethical guidelines (code of
conduct) issued by the regulatory authorities assumed importance.
Srinivasan (2002)19 conducted an empirical study on the marketing problems of certain market
players in financial sector including merchant bankers. According to him, the marketing
problems as revealed by merchant bank respondents were fluctuations in security market,
frequent changes in interest rates and policy, competition for funds from other institutions
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(mutual funds, insurance, foreign banks), lack of systematic efforts at image making by
merchant bankers, lack of proper branding among merchant banking products, lack of effective
media exposure, lack of overall marketing coordination and segmentation. The author presented
a bright future for merchant banking in India since infrastructure projects, power projects and
Euro issues were getting big thrust under the liberalization policies of the government.
Madan (2003)20 in his research paper studied the underpricing of initial public offerings during
the period 1992-95 and found a very high initial excess return on IPOs in the Indian primary
capital market as compared to the experience of capital markets of other countries. The study
covered a set of 1,597 companies with IPOs during 1989-1995 listed at the BSE. The study
found that out of the 1,597 IPOs, 72 issues were fairly priced (Zero return on listing), 157 were
overpriced (negative return on listing) and 1368 issues were underpriced (positive return on
listing). Initial return on IPOs was found to be quite high (94%). Year wise performance in terms
of return on listing was found to be as high as 287% for the year 1991 and as low as 26.6% for
the year 1995. Also issues at par were seen to perform better than issues at premium.
A negative relationship was found between return on listing and the issue price and the size of
the issue (lower the issue price and size, higher is the return accrued).However, a positive
relationship was established between return on listing and the foreign equity holding in the
company as also the issue rating.
The paper concluded that the return was high on IPOs in the short period, but it declined with the
passage of time. There has been a drastic fall in the return on IPOs in the long run and returns
were found to be negative from the second to fifth year of listing. The paper also highlighted the
emergence of private placement market in India as it was both cost and time effective method of
raising funds. However, it was highly informal market. So author suggested for guidelines by
SEBI for private placement market.
Dhawan (2004)21 in his article identified the decline in revenue of investment banks in the year
2000 due to the meltdown of equity issues, and merger and acquisition deals. The bidding war
between various investment banks had pushed the fees on privatization deals to less than 1% of
the deal size (one of the biggest $ 2 billion ONGC deal was won by Kotak at 0. 075% and GAIL
bid went to HSBC at 0.14%) The fees for private sector deals too were lower at 2.5%. During
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boom period, Silver Line Technologies and Rediff.com had paid 7% to their investment banks
for raising capital and getting itself listed. Even the Govt. paid higher fee in those days (1.24%
for VSNL GDR and 2.25% for GAIL GDR). The author pointed out that commercial banks like
ICICI banks, Citigroup and HSBC Securities improved their ranking in the M&A advisory
business at the cost of traditional players like DSP Merrill Lynch & JM Morgan Stanley.
The paper foresaw the major component of investment banking revenue from raising equity
capital than other activities. The author recommended that Indian merchant bankers should tie up
with global firms to tap the growing market of cross border acquisitions.
Ghosh (2004)22 in his paper empirically investigated the boom and slump phases in the Indian
primary capital market. The paper attempted to analyses the factors that influenced the volume,
underpricing and timing of IPOs in the hot and cold phases in Indian IPO market. The study
covered the period from 1993-2004 which was further divided into two phases: boom phase
(1993-96) when on average 50 companies got listed on BSE on monthly basis and slump phase
(1997-2001) when there was a considerable decline in the number and total amount of new
issues. The study found that during the boom period, a companys decision to go public
depended more on past IPOs volume as compared to slump period. Empirical evidence found no
significant relation between IPO volume and initial returns during hot and cold period. The main
reason for this was the long time taken by Indian companies to get listed on the stock exchange
after the decision to go public. The researcher also studied the effect of other parameters
(industry type, age of company, size of new issues) on the volume of IPOs in hot and cold market
and found no significant influence of industry affiliation on the IPOs during the hot market. The
paper concluded that the established companies raised large amount from the primary market and
underpricing considerably was more during the cold phase whereas the small and young
companies timed their public issues during the boom phase in the primary market.
Gupta (2004)23 in his article stated that the integration of Indian economy and its dynamic
status calls for a number of challenges for investment banks in India. According to the author, the
problems faced by Indian investment banks included increasing competition, tough operating
environment and decreasing margin. Some critical areas which pose a challenge to investment
banks are broadening the customer base, ensuring due diligence, appropriate valuation process,
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strong relation management with customers, trusted and strategic advice, compliance to ethical
and regulatory code of conduct and accurate and greater disclosures.
The author recommended for the integration of Indian merchant banking with global financial
markets so as to have a major focus on investment in intellectual capital, placement and
marketing capabilities, size and scope of services, relationship management, and transparency in
disclosure practices, corporate governance and use of technology for cost effectiveness.
Khan (2005)24 in his article highlighted the excellent performance of the primary capital market
in 2004-05. The major reasons for this boom were found to be low interest rates, recovery of
investors confidence, and high growth of GDP, FII inflows, efficient exchange rate management
and good liquidity in the economy. Average size of the issue has gone up to Rs. 470 crore in
2004-05 as compared to Rs. 11.7 crore in 1995-96 due to the arrival of mega issues and the exist
of small companies. The small companies raised relatively small amount from the market due to
high transaction costs, high listing fee and strict disclosure norms set by SEBI to protect
investors. The author expressed concern that funds raised by Govt. companies, financial
institutions and banks might not result in capital formation and hence might not lead to higher
production, economic growth and employment generation. He pointed out that 99.8% of equity
shares were raised at premium during 2004- 2004-05 as compared to 76.6% in 2000-01. This
showed the high expectations among investors for safe, fair and honest capital market. But
academicians had reservations about this as they felt that qualified institutional investors, FIIs
and high net worth investors in collusion with the issuers were able to manipulate the share
prices due to the asymmetry of information in the stock market. The recommendations by the
author included improvement in the information efficiency in the market and implementation of
corporate governance not only by listed companies, but by market intermediaries also.
Sharma (2005)25 in her research paper studied the marketing effectiveness in merchant banking
services in India. According to the researcher, the liberalization process in India has led to major
developments in the industrial sector to make India a truly formidable and globally competitive
industrial power and consequently, the merchant banks have emerged as an important
intermediary in the financial market. The study aimed to analyses the relevance of marketing mix

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in the merchant banking services and to make a comparative analysis of its effectiveness of
public as well as the private sector merchant banks.
The researcher found that the people was the most important component of marketing mix
followed by product, price, promotion and place respectively. The results also showed that
private sector merchant banking had more effective and efficient marketing mix as compared to
public sector merchant banks. Unbalanced service mix with the dominance of issue management,
inadequate quality of services, inadequate distribution network and inadequate promotional
measures were found to be the major deficiencies which hindered the marketing performance of
merchant banks in India.

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RESARCH METHODOLOGY

METHOD OF DATA COLLECTION

Methods of Data Collection
Primary Data usually consists of the data that are collected afresh for the rst time
and thus is original in character. Primary Data that used in the study
Questionnaire- In my Questionnaire There are 10 Questions

Secondary Data consists of data that is collected from some existing literature. It has
been already analyzed by someone else earlier and is derived from that source. Secondary
Data that used in the study are
Newspapers
Websites
Books

Analysis Pattern
Statistical Tools- graphs & charts
Cross Tabulation Of Data

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DATA PRESENTATION AND ANALYSIS

Q 1 Do you take any nancial services from bank?

Sr. no.

ANSWER

No.s

percentage

YES

36

45

NO

44

55

TOTAL

80

100

Interpretation Out of total respondents, 45% respondents have taken Financial Service and rest
55% respondents have not taken the Financial Service.

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Q 2 Do you know about Merchant Banking?.

Sr. no.

ANSWER

Nos.

percentage

YES

32

40

NO

48

60

TOTAL

80

100

Interpretation 40% percent say they know about merchant banking, 60% say they dont know.

Q 3 Are you satised with the services provided by your bank?

Sr. no.

ANSWER

No.s

percentage

YES

35

43.75

NO

45

56.25

TOTAL

80

100

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Interpretation Out of total respondents, 43.75% respondents Satised and rest 60% respondents
dont Satised.
Q4 Which bank provides you services?

Sr. No.

Bank

percentage

ICICI

20

SBI

35

PNB

20

BOI

15

Other

10

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Interpretation: Large no. of companies takes nancial services from SBI.

Q 5 What is the position of Merchant Banking in Private Sector?

Sr. no.

Position

Percentage

Good

50

Normal

35

Bad

15

Total

100

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Interpretation Out of total respondents, 50% respondents Say Good, 35% Say Norm al and rest
15% respondents say bad.

Q 6 What is the position of Merchant Banking in Public Sector?

Sr. no.

Position

Percentage

Good

40

Normal

55

Bad

Total

100

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Interpretation Out of total respondents, 40% respondents Say Good, 55% Say Normal and rest
5% respondents say bad

Q7 What type of security have you deposited/you will deposit with the banks ?

Sr. no

Type of security

No.

Percentage

Bank deposit (FD)

18

22.5

Gold

Land papers

50

62.5

Third person security

12

15

Total

80

100

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Q 8 Are you satised by Security margin of bank?

Sr. no.

ANSWER

No.s

percentage

YES

60

75

NO

20

25

TOTAL

80

100

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Interpretation Out of total respondents, 80% respondents Satised and rest 20% respondents
dont Satised.

Q 9 Are you satised with timely services provide by banks

Sr. no.

ANSWER

No.s

percentage

YES

56

70

NO

24

30

TOTAL

80

100

Interpretation Out of total respondents, 75% respondents Say that They are timely heard and rest
25% say that They are not timely served by merchant banking.
Q10 Will it differ from investment banks?

Sr. no.

ANSWER

No.s

percentage

YES

60

75

NO

20

25

TOTAL

80

100

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Interpretation Out of total respondents, 75% respondents think that it is diff er and rest 25%
respondents d0nt think so.

Thus I conclude by saving that Merchant Banking business can help banks to improve their
profitability and achieve sustained growth but for that the know how and awareness of their
features functions and benets to the prospective users should be known by taking up various
measures like advertisement and other forms of media and campaigns.

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QUESTIONNAIRE
Respondents Prole
Name:
Age:
Gender:
Occupation:
1. Do you take any nancial services from bank?
(a) Yes ( )
(b) No ( )
2. Do you know about Merchant Banking?
(a) Yes ( )
(b) No ( )
3. Are you satised with the services provided by your bank?
(a) Yes ( )
(b) No ( )
4. Which bank provides you maximum services?
(a) ICICI ( )
(b) SBI ( )
(c) PNB ( )
(d) BOI ( )
(e) OTHER(specify)

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5. What is the position of Merchant Banking in Private Sector?

(a) Good ( )
(b) Normal ( )
(c) Bad ( )
6. What is the position of Merchant Banking in Public Sector?
(a) Good ( )
(b) Normal ( )
(c) Bad ( )
7. What type of security have you deposited/you will deposit with the banks
(a) Bank security ( )
(b) Gold ( )
(c) Land paper ( )
(d) Third party security ( )
8. Are you satised by Security margin of bank?
(a) Yes ( )
(b) No ( )
9. Are you satisfied with timely services provided by bank?
(a) Yes ( )
(b) N0 ( )
10. Will it differ from investment banks?
(a) Yes ( )
(b) N0 ( )

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OBSERVATIONS, SUGGESTIONS AND COMMENTS

From the studies we find out that;Out of total respondents, 45% respondents have taken Financial Service and rest 55%
respondents have not taken the Financial Service.
Out of total respondents, 40% respondents Know about merchant banking and rest
60% respondents dont know about merchant banking.
Out of total respondents, 43.75% respondents Satised and rest 60% respondents
dont Satised.
Large no. of companies takes nancial services from SBI.
Out of total respondents, 50% respondents Say Good, 35% Say Norm al and rest 15%
respondents say bad.
Interpretation Out of total respondents, 40% respondents Say Good, 55% Say normal and rest
5% respondents say bad
Interpretation Out of total respondents, 80% respondents Satised and rest 20% respondents
dont Satised
Interpretation Out of total respondents, 75% respondents Say that They are timely heard and rest
25% say that They are not timely served by merchant banking.
Interpretation Out of total respondents, 75% respondents think that it is diff er and rest 25%
respondents d0nt think so.

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CONCLUSION
The merchant banker plays a vital role in channelizing the nancial surplus of the society into
productive investment avenues.
Hence before selecting a merchant banker, one must decide, 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 nancial body in Indian nancial
system. Market development is predicted on a sound, fair and transparent regulatory framework.
To sustain the growth of the market and crystallize the growing awareness and interest into an
essential, to remove the trading malpractice and structural inadequacies prevailing in the market,
and provide the investors an organized, well regulated market.

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REFERENCES AND BIBLIOGRAPHY

SBI CAPITAL MARKETS LIMITED- Chief Syndicated Loan ManagerMr. Amit Bansod
Secondary Sources:
Books:
1. Merchant Banking in India- K C Gupta and Joginder Singh.
2. Merchant Banking In India: Evolution and Emergence, Functions, Rules
And Regulations, Experiences and Challenges- C N Krishna Naik B C
Lakshmanna.
3. Merchant Banking- H R Machiraju.
Websites:
1. www.google.com/news
2. www.answer.com
3. www.emissarycapital.com
4. www.wikipedia.com
5. www.sebi.gov.in
6. http://unionbankondia.co.in
7. http://www.asialaW.com/Article/l988860/Merchant-Banking.html
8. http://www.icicisecuritiescom
9. http://www.sbicaps.con1
10. http://www.bobcapitalmarkets.com
1 l. http://www.pnbindia.in/subsidiaries
l2. http://www.kotaksecurities.com
13. http://www.canmoney.in

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