INSTITUTE- University School

of Business
DEPARTMENT-
Management
MBA
Financial Markets and Services

Chapter 2- Merchant DISCOVER . LEARN . EMPOWER

Banking
 www.indiamart.com

Merchant
Banking In
• Space for visual (size 24)

India
Course Outcome

CO Title Level
Number Will be covered in this
CO1 Remember lecture
Students will have a thorough knowledge about
the financial system and its functioning

CO2 Understand
Students will be able to understand the
emerging role and regulations relating to the
financial services in India

CO3 Students will be able to know the services Understand

provided by the Indian market
2
Source :moneymatters.com 3
 Merchant Banking - Meaning

“Merchant banking means any person who is engaged in the

business of issue management either by making
arrangements regarding selling, buying, underwriting or
subscribing to the securities underwriter, manager,
consultant, advisor or rendering corporate advisory services
in relation to such issue management”
Services Rendered by Merchant Banker
 Corporate Counseling
 Project Counseling and Pre-investment Studies
 Capital Restructuring
 Credit Syndication and Project Finance
 Issue Management and Underwriting
 Portfolio Management
 Non-resident Investment
 Working Capital Finance
 Acceptance Credit and Bill Discounting
 Mergers, Amalgamations and Takeovers
 Venture Capital Financing
 Lease Financing
 Foreign Currency Finance
 Fixed Deposit Broking
 Mutual Funds Floatation and Management
 Registration of Merchant Banker
1. The applicant should be a body corporate.
2. The applicant should not carry on any business other than those connected
with the
securities market.
3. The applicant should have necessary infrastructure like office space,
equipment,
manpower, etc.
4. The applicant must have at least two employees with prior experience in
merchant banking.
5. Any associate company, group company, subsidiary or inter connected
company of the applicant should not have been a registered merchant banker.
6. The applicant should not have been involved in any securities scam or proved
guilty for any offence.
7. The applicant should have a minimum net worth of Rs. 5 crores
 Functions of Merchant Banker
 Management of debt and equity offerings
 Promotional activities
 Placement and distribution
 Corporate advisory services
 Project advisory services
 Loan syndication
 Providing venture capital and mezzanine financing
 Leasing Finance
 Bought out deals
 Non-resident Investment
 Advisory services relating to mergers and acquisitions
 Portfolio management
 ISSUE MANAGEMENT

Issue management refers to management of securities offering of clients to the

general public and existing shareholders on right basis. Issue managers are
known as Merchant Banker or Lead managers
Type of Issues

Issues are of three types. They are as follows:

(a) Public Issue,
(b) Right Issue, and
(c) Private Placements.
 Public Issue-Reasons for Going Public

1. To raise funds for financing capital expenditure needs like

expansion, diversification, etc.
2. To finance increased working capital requirement.
3. As an exit route for existing investors.
4. For debt financing.
 Public Issue-Advantages
 The IPO provides avenues for funding
future needs of the company.
 It provides liquidity for the existing shares.
 The reputation and visibility of the
company increases.
 Additional incentive for employees in the
form of the company’s stocks. This also
helps to attract potential employees.
 It commands better valuation for the
company.
 Public Issue-Disadvantages
1. The profit earned by the company should be
shared with its investors in the form of
dividends.
2. An IPO is a costly affair. Around 15-20% of
the fund realised is spent on raising the
same.
3. In an IPO, the company has to disclose
results of operations and financial position
to the public and the Securities and
Exchange Board of India (SEBI).
4. The company has to invest substantial
management time and effort.
Marketing of the Issue
1. Timing of the Issue
2. Retail Distribution
3. Reservation of the Issue
4. Advertising Campaign
 Post-issue Activities

• Principles of Allotment
• Formalities associated with Listing
Merchant Bankers in India
There are 135 Merchant bankers who are registered with SEBI now in India. There are public
sector, Private sector and foreign players registered with SEBI.
Foreign Players in Merchant Banking:
Public sector Merchant Bankers:
SBI CAPITAL MARKETS LTD
Goldman Sachs (Foreign Players in Merchant
PUNJAB NATIONAL BANK Banking:
BANK OF MAHARASHTRA  Goldman Sachs (India) Securities Pvt. Ltd.
IFCI FINANCIAL SERVICES LTD  Morgan Stanley India Company Pvt Ltd
KARUR VYSYA BANK LTD,  Barclays Securities (India) Pvt. Ltd
STATE BANK OF BIKANER AND JAIPUR  Bank Of America
 Deutsche Bank
Private Sector Merchant Bankers:  Deutsche Equities India Private Limited
 ICICI Securities Ltd  Barclays Bank Plc
 Axis Bank Ltd.  Citigroup Global Markets India Pvt. Ltd.
 Bajaj Capital Ltd
 Dsp Merrill Lynch Ltd
Tata Capital Markets LtdPrivate Sector Merchant Bankers:
 ICICI Securities Ltd  Fedex Securities Ltd
 Axis Bank Ltd.  Fedex Securities Ltd
 Bajaj Capital Ltd
 Tata Capital Markets Ltd
 Reliance Securities Limited
 Kotak Mahindra Capital Company Ltd
 Yes Bank Ltd.

 Reliance Securities Limited 15

 Kotak Mahindra Capital Company Ltd
 SERVICES OF MERCHANT BANKERS

PROJECT COUNSELLING :
It includes preparation of project reports,deciding upon the financing pattern, appraising
the project relating to its technical, commercial and financial viability. It includes filling
up of application forms for obtaining funds from financial institutions.

LOAN SYNDICATION :
Assistance is rendered to raise loans for projects after determining promoter’s
contribution. These loans can be obtained from a single institution or a consortium.
ISSUE MANAGEMENT :
Management of issues involves marketing of corporate securities ie…equity shares,
preference shares and debentures by offering them to public.
 Pre-issue activities:
They prepare copies of prospectus and send it to to SEBI and then file them to
Registrar of Companies
They conduct meetings with company representatives and advertising agencies to
decide upon the date of opening issue,closing issue,launching publicity campaign etc..
They help the companies in fixing up the prices for their issues
 Post-issue activities:
It includes collection of application forms,screening of applications,deciding allotment
procedure,mailing of allotment letters,,share certficates and refund orders
UNDERWRITING OF PUBLIC ISSUES :
Underwriting is an assurance to the company which makes public issues. Raising of
external resources is easy for the issues backed by well known underwriters.
MANAGERS,CONSULTANTS OR ADVISERS TO THE ISSUE :
SEBI insist that all issues should be managed by atleast one authorised merchant
banker but not more than two. For an issue of 100 crores, upto a maximum of four
merchant bankers shall be appointed. They help in listing of shares in stock
exchange, completion of formalities under Companies Act etc..
PORTFOLIO MANAGEMENT :

Portfolio refers to investment in different kinds of securities such as

shares,debenture issued by different companies.It is a combination of assets but a
carefully blended asset combination.

Portfolio management refers to maintaining proper combination of securities in a

manner that they give maximum return

Investors are interested in safety,liquidity and profitability of his investment but

they cant choose the appropriate securities.So merchant bankers help their
investors in choosing the shares.They conduct regular market and economic
surveys.
NRI INVESTMENT :
NRIs has to follow lots of complicated rules for investing in the shares in India.Merchant
bankers help them in choosing the shares and offer expert advice fulfilling government
regulations thus mobilising more resources for corporate sector.
ADVISORY SERVICE RELATING TO MERGERS AND TAKEOVERS :
Merger is a combination of two or more companies into a singe company where one
survives and other loses its existence
Takeover is the purchase by one company acquiring controlling interest in the share
capital of another company
Merchant banker acts as middlemen between offeror and offeree,negotiates mode of
payment and gets approval from government.
OFF SHORE FINANCE :
Merchant bankers help their clients in :
Long term foreign currency loan
Joint venture abroad
Financing exports and imports
Foreign collaboration arrangement
BANKS PROVIDING MERCHANT BANKING SERVICES IN INDIA

Commercial banks
Foreign banks like National Grindlays Bank, Citibank, HSBC bank etc..
Development banks like ICICI,IFCI,IDBI etc..
SFC , SIDCs
Private firms like JM Financial and Investment service , DSP Financial Consultants,
Ceat Financial Services,Kotak Mahindra, VMC Project Technologies,Morgan
Stanley,Jardie Fleming,Klienwort Benson etc…
MERCHANT BANKING REGULATIONS :
Certificate from SEBI is a must.They are of four types:
Category I merchant bankers : Can act as Issue managers
Category II merchant bankers : can act only as co-managers
Category III merchant bankers : can act as co-managers but cannot undertake
portfolio management
Category IV merchant bankers :can merely act as consultant or advisor to issue of
capital
CAPITAL ADEQUACY NORMS :
Category I : Rs. 5 crores
Category II : Rs.50 lakhs
Category III : Rs.20 lakhs
Category IV : Nil
GUIDELINES FOR MERCHANT BANKERS :
SEBI’s authorization is a must to act as merchant bankers.Authorisation criteria
include
 Professional qualification in finace,law or business management
 Infrastructure like office space,equipment and man power
 Capital adequacy
 Past track of record,experience,general reputation and fairness in all

transactions
Every merchant banker should maintain copies of balance sheet,Profit and loss
account,statement of financial position
Half-yearly unaudited result should be submitted to SEBI
Merchant bankers are prohibited from buying securities based on the unpublished
SEBI has been vested with the power to suspend or cancel the authorisation in case of
violation of the guidelines
Every merchant banker shall appoint a ‘Compliance Officer‘ to monitor compliance of
the Act
SEBI has the right to send inspecting authority to inspect books of accounts,records etc…
of merchant bankers
Inspections will be conducted by SEBI to ensure that provisions of the regulations are
properly complied
An initial authorisation fee,an annual fee and renewal fee may be collected by SEBI
A lead manager holding a certificate under category I shall accept a minimum
underwriting obligation of 5% of size of issue or Rs.25 lakhs whichever is less
CODE OF CONDUCT :

Should make all efforts to protect the interest of investors

Should maintain high standards of integrity,dignity and fairness in conduct of business
Should fulfill all obligations in a professional and ethical manner
Should not discriminate among the clients
Should ensure that prospectus, letter of offer etc.. is available to investors at the time of
issue
Should render best possible advice to its clients
Any penal action taken by SEBI should be informed to its clients
Should inform the board about any legal proceedings initiated against it
Should abide by the rules of ‘‘Securities and Exchange Board of India
Regulations,2003 “
Shall develop its own internal code of conduct for governing its internal
operations
Should ensure that any person it employs should have the capacity to be a
merchant banker
It is responsible for the act of its employees and agents
Should not create false market
SOME PROBLEMS OF MERCHANT BANKERS

SEBI stipulates high capital adequacy norms for authorisation which prevents
young,specialised professionals into merchant banking business
Non co-operation of the issuing companies in timely allotment of securities
and refund of application of money etc.. is another problem
Yet merchant banking is vast but should develop adequate expertise to
provide a full range of merchant banking services
 references
• https://www.invoicebankers.com/factoring_articles/factoring-accounts-recei
vables-examples/
• https://www.citeman.com/4803-legal-aspects-of-factoring.html (legal
aspects of factoring)
• https://www.citeman.com/4803-legal-aspects-of-factoring.html (legal
aspects of factoring)
• http://www.howtoexcel.info/Finance/Factoring_India.htm(factoring
definition, types and companies providing factoring services in india)
• http://www.hsbc.co.in/1/2/corporate/factoring-services(hsbc provides
factoring services in india)
THANK YOU

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