This chapter discusses merchant banking. It begins with an introduction and history of merchant banking. Merchant banks engage in underwriting securities, advising clients on mergers and acquisitions, and owning commercial ventures. They differ from commercial banks in that their primary function is advising corporate clients and assisting with fundraising rather than providing loans. Merchant banking in India is regulated by SEBI which sets rules for registration, responsibilities, inspections, and penalties for noncompliance.
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Chapter 6
This chapter discusses merchant banking. It begins with an introduction and history of merchant banking. Merchant banks engage in underwriting securities, advising clients on mergers and acquisitions, and owning commercial ventures. They differ from commercial banks in that their primary function is advising corporate clients and assisting with fundraising rather than providing loans. Merchant banking in India is regulated by SEBI which sets rules for registration, responsibilities, inspections, and penalties for noncompliance.
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Financial Services by Renuka
Sharma and Kiran Mehta 1
This chapter will help the readers to: ◦ Recall what a merchant bank is. ◦ Understand the functions performed by merchant banks. ◦ Analyse how merchant bank is different from commercial banks. ◦ Evaluate the kind of regulations applicable on the functioning of merchant banking in India.
Financial Services by Renuka
Sharma and Kiran Mehta 2 INTRODUCTION HISTORY AND GROWTH OF MERCHANT BANKING
Financial Services by Renuka
Sharma and Kiran Mehta 3 “A merchant bank is an organization that underwrites securities for corporations, advises such clients on mergers and is involved in ownership of commercial ventures. These organizations are sometimes banks which are not merchants and sometimes houses which are neither merchants nor banks” —Random House Dictionary “Merchant banking is the development of banking from commerce which frequently encountered a prolonged intermediate stage known in England originally as merchant banking” —Charles P Kindleberger “A merchant banker has been defined 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 managers consultant, advisor or rendering corporate advisory services in relation to such issue management” —SEBI (Merchant Bankers) Rules 1992 Financial Services by Renuka Sharma and Kiran Mehta 4 Financial Services by Renuka Sharma and Kiran Mehta 5 Financial Services by Renuka Sharma and Kiran Mehta 6 Financial Services by Renuka Sharma and Kiran Mehta 7 Services
Income
Fund Generation
Set Up
Customers
Scope
Financial Services by Renuka
Sharma and Kiran Mehta 8 Financial Services by Renuka Sharma and Kiran Mehta 9 Financial Services by Renuka Sharma and Kiran Mehta 10 Application for Grant of Certificate Application to Conform to the Requirements Furnishing of Information, Clarification, and Personal Representation Consideration of Application Capital Adequacy Requirement Procedure for Registration Renewal of Certificate Conditions of Registration Period of Validity of Certificate Procedure where Registration is not Granted Effect of Refusal to Grant Certificate Payment of Fees and the Consequences of Failure to Pay Fee
Financial Services by Renuka
Sharma and Kiran Mehta 11 Code of Conduct for Merchant Bankers
Lead Merchant Banker Not to Associate With a
Merchant Banker Without Registration
Disclosures to the Board
Appointment of Compliance Officer
Financial Services by Renuka
Sharma and Kiran Mehta 12 Financial Services by Renuka Sharma and Kiran Mehta 13 In United Kingdom, the merchant bankers came into existence in 19th century and the Baring Bank is known as the oldest merchant bank. The merchant banking in India was formally introduced by the National and Grindlays Bank which was known as Grindlays Bank in 1967. A merchant banker is one who can be in the form of a bank or company or firm or even a proprietary concern, which works as an intermediary between a company (by assisting it to raise funds) and investor (by assisting him/her in channelizing savings), or takes charge of various functions and activities related to pre-issue management and post-issue management, or underwrites the securities of a company and provides necessary advice to its clients, or perform all these activities. The scope and functions of merchant banks include, Corporate Counseling, Capital Restructuring, Credit Syndication and Project Finance, Fixed Deposit Banking, Foreign Currency Finance, Issue Management and Underwriting, Lease Financing, ergers, Amalgamations and Takeovers, Pre-investment studies, Portfolio Management, Project Appraisal, Project Counseling, Working Capital Finance, Venture Capital and Other Services, etc. Financial Services by Renuka Sharma and Kiran Mehta 14 There is a difference between a merchant bank and a commercial bank. Commercial banks, basically, provide loans to individuals, small businesses. The primary function of a merchant bank is issue management of their corporate clients. It also provides other services like project appraisal, factoring, bills discounting and other advisory services related to foreign investment, joint venture, mergers and takeovers. Security Exchange Board of India (Merchant Bankers) Regulations, 1992 provides regulations for merchant banks in India in detail. SEBI (Merchant Bankers) regulations contain five Chapters and these are Chapter I – Preliminary, Chapter II – Registration of Merchant Bankers, Chapter III – General Obligations and Responsibilities, Chapter IV – Procedure for Inspection and Chapter V – Procedure for Action in Case of Default. Financial Services by Renuka Sharma and Kiran Mehta 15 Financial Services by Renuka Sharma and Kiran Mehta 16