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DEFINITION:

In banking, a merchant bank is a financial institution primarily engaged in offering financial services and advice to corporations and wealthy individuals on how to use their money. The term can also be used to describe the private equity activities of banking.

The Notification of the Ministry of Finance defines a merchant banker as, any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities as a manager, consultant, advisor or rendering corporate advisory service in relation to such issue management.

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

Importance and Need of Merchant Banking

Important reason for the growth of merchant banking Developmental activity throughout the country It is exerting excess demand on the sources of funds for ever expanding industry and trade, thus, leaving a widening gap under bridged between the supply and demand of inventible funds. All Indian financial institutions and experienced resources constraint to meet the ever increasing demands for funds from the corporate sector enterprises. In the circumstances corporate sector had the only alternative to avail of the capital market services for meeting their long-term financial requirements through capital issues of equity and debentures. With the growing demand for funds there was pressure on capital market that caused the commercial banks, share brokers and financial consultant firms to enter into the field of merchant banking and share the growing capital markets. With the result, all the commercial banks in nationalized and public sector as well as in private sector including the foreign banks in India have opened their merchant banking windows and are competing in this field. There has been a mushroom growth of financial consultancy firms and broker firms doing advisory functions as well as managing public issues in syndication with other merchant bankers. Huge Public Savings lying still untapped Merchant banks can play highly significant role in mobilizing funds of savers to investible channels assuring promising return on investments and thus can help in meeting the widening demand for investible funds for economic activity. Expansion, Modernization, Diversification With the growth of merchant banking profession corporate enterprises in both public and private sectors would be able to raise required amount of funds annually from the capital market to meet the growing requirements for funds for establishing new enterprises, undertaking expansion/modernization/diversification of the existing enterprises. This reinforces the need for a vigorous role to be played by merchant banks.

Merchant banks have been procuring impressive support from capital market for the corporate sector for financing their projects. This is evidenced from the increasing amount raised form the capital market by the corporate enterprises year after year. Complying with Rules, Regulation and Guidelines (Corp Advice) In view of multitude of enactments, rules and regulations, guidelines and offshoot press release instructions brought out by the government from time to time imposing statutory obligations upon the corporate sector to comply with all those requirements prescribed therein, the need of skilled agency existed which could provide counseling in these matters in a package form. Merchant bankers, with their skills, updated information and knowledge, provide this service to the corporate units and advise them on such requirements to be complied with for raising funds from the capital market under different enactments viz. Companies Act, Income-tax Act, Foreign Exchange Regulation Act, Securities Contracts (Regulation) Act and various other corporate laws and regulations. Investor Advice / Benefits Merchant bankers advise the investors of the incentives available in the form of tax reliefs, other statutory relaxations, good return on investment and capital appreciation in such investment to motivate them to invest their savings in securities of the corporate sector.

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 suggest ways and means to solve it. The nature of merchant banking services is development oriented and promotional to help the industry and trade to grow and survive. Merchant banker is, therefore, dedicated to achieve this objective through his dynamism. He is always awake to renew his skills, develop expertise in new areas so as to equip himself with the knowledge and techniques to deal with emerging new problems of corporate business world. He has to keep pace with the changing environment where government rules, regulations and politics affecting business conditions frequently change; where science and technology create new innovations in production processes of industries envisaging immediate renovations, diversifications, modernizations or replacements of existing plant and machinery or other equipments putting new demands for finances and necessitating overhauling of the capital structure of the firms. Merchant banker has to think and devise new instruments of financing industrial projects. He has to assume wider responsibilities of saving industrial units from going sick and guiding industries to be setup in industrially backward areas to eliminate regional imbalances in industrial development of the country. He has to guide the wider section of the community possessing surplus money to invest in corporate securities and other productive investment channels. He has to help the industry in different forms to ensure that it runs risk free and devoid of uncertainty by assisting the promoters with his knowledge and skills to resolve the problems being faced by them. He has to watch the interest and win over the confidence of the government, its agencies, along with the entrepreneurs, the investors and the whole community. He must bridge the communication gap between different sections and resolve the problem being faced in different areas concerned with the business world. To discharge the above role, a merchant banker has to be dynamic. In the days ahead, merchant bankers have very significant role to play tuning their activities to the requirements of the growth pattern of the corporate sector, the industry and the economy as a whole which is, in it, a challenging task and to meet these challenges merchant bankers will have to be more vigorous and strategic in playing their role. They will have also to adopt new ways and means in discharging their role.

Organizational setup of merchant bankers in India


In India a common organizational setup of merchant bankers to operate is in the form of divisions of Indian and foreign banks and financial institutions, subsidiary companies established by bankers like SBI, Canara Bank, Punjab National Bank, Bank of India, etc. Some firms are also organized by financial and technical consultants and professionals. Securities and Exchange Board of India has divided the merchant bankers into four categories based on their capital adequacy. Each category is authorized to perform certain functions. From the point of organizational setup Indias merchant banking organizations can be categorized into four groups on the basis of their linkage with parent activity. They are: (A) Institutional Base Where merchant banks function as an independent wing or as subsidiary of various private/Central Governments/State Governments financial institutions. Most of the financial institutions in India are in public sector and therefore such setup plays a role on the lines of government priorities and policies. (B) Banker Base These merchant bankers function as division/subsidiary of banking organization. The parent banks are either nationalized commercial bank or the foreign banks operating in India. These organizations have brought professionalism in merchant banking sector and they help their parent organization to make a presence in capital market. (C) Broker Base In the recent past there has been an inflow of qualified and professionally skilled brokers in various stock exchanges of India. These brokers undertake merchant banking related operations also like providing investment and portfolio management services. (D) Private Base These merchant banking firms are originated in private sector. These organizations are the outcome of opportunities and scope in merchant banking business and they are providing skilloriented specialized services to their clients. Some foreign merchant bankers are also entering either independently or through some collaboration with their Indian counterparts. Private sector merchant banking firms have come up either as the sole proprietorship or public limited

companies. Many of these firms were in existence for quite some times before they added a new activity in the form of merchant banking services by opening new divisions on the lines of commercial banks and All India Financial Institutions.

Guidelines of SEBI
After the obligations of the CCI, the place was occupied by a legal organ called as Securities and Exchange Board of India. The issue of capital and pricing of issues by compan ies has become free of prior approval. The SEBI has issued guidelines for the issue of capital by the companies. The guidelines broadly covers the requirement of the first issue by a new or the first issue of a new company set up by the existing company, the first issue by the existing private companies and public issues by the existing listing companies. The SEBI is the most powerful organization to control and lead both the primary market and secondary market. The SEBI has announced the new guidelines for the disclosures by the Companies leading to the investor protection. They are presented below: a) If any Companys other income exceeds 10 per cent of the total income, the details should be disclosed. b) The Company should disclose any adverse situation which affects the operations of the Company and occurs within one year prior to the date filing of the offer document with the Registrar of Companies or Stock Exchange. c) The Company should also disclose the information regarding the capacity utilization of the plant for the last 3 years. d) The Promoters of the Company must maintain their holding at least at 20 per cent of the expanded capital. e) The minimum application money payable should not be less than 25 per cent of the issue price. f) The company should disclose the time normally taken for the disposal of various types of investors grievances. g) The Company can make firm allotments in public issues as follows: Indian mutual funds (20%),

FIIS (24%), Regular employees of the company (10%), Financial institution (20%). h) The Company should disclose the safety net scheme or buy back arrangements of the shares proposed in public issue. This scheme is applicable to a limited number of 500 shares per allottee and the offer should be valid for a period of at least 6 months from the date of dispatch of securities. i) According to the guidelines, in case of the public issues, at least 30 mandatory collection

centres should be established. j) According to the SEBI guidelines regarding rights issue, the Company should give

advertisements in not less than two news-papers about the dispatch of letters of offer. No preferential allotment may be made along with any rights issue. k) The Company should also disclose about the fee agreed between the lead managers and the

Company in the memorandum of understanding.

SERVICES PROVIDED BY MERCHANT BANKS: (in detail)


Merchant bankers not only provide advisory services to corporate enterprises but also advise the investors of the incentives available in the form of tax relief and other statutory obligations. Thus, the merchant bankers help industry and trade to raise funds, and the investors to invest their saved money in sound and healthy concerns with confidence, safety and expectation of higher yields.

Broadly a merchant banker can provide the following services: 1. Corporate Counseling 2. Project Counseling And Pre-Investment Studies 3. Credit Syndication And Project Finance 4. Issue Management 5. Underwriting 6. Bankers 7. Portfolio Management 8. Venture Capital Financing 9. Leasing 10.Non-Resident Investment Counseling And Management 11.Acceptance Credit And Bill Discounting 12.Advising On Mergers, Amalgamations And Take-Over 13.Arranging Offshore Finance 14.Fixed Deposit Broking 15.Relief To Sick Industries

Corporate Counseling 1. It includes a whole range of financial services provided by a merchant banker to a corporate unit 2. a view to ensure better performance, maintain steady growth and create a better image among investors. 3. It covers the entire field of merchant banking activities i.e., project counseling, capital restructuring, portfolio management and the full range of financial engineering including venture capital, public issue management, loan syndication, working capital, fixed deposits, lease financing, acceptance credit, etc. 4. the scope of corporate counseling is limited to suggestions and opinions leaving to the client to take corrective actions for solving its corporate problems. 5. A merchant banker finds out the problems of enterprise, which shall include organizational goals for the enterprise, size of the organization and operational scales, choice of a product, pricing, etc, and suggests ways and means to solve those problems.

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

Leasing Is there another lucrative area of financing where merchant bankers are turning? Leasing is a viable source of financing while acquiring capital assets. The services include arrangement for lease finance facilities for leasing companies, legal; documents and tax consultancy.

Project Counseling 1. Project counseling is an important merchant banking service which includes preparation of project reports, deciding upon the financing pattern to finance the cost of the project, appraising the project report with the financial institutions/banks. 2. Project reports are prepared to obtain government approval of the project, for procuring financial assistance from financial institutions and banks, for ensuring market for the proposed product, for planning public issues, etc. 3. Financing the project cost is an important aspect of project counseling. 4. The two sources of funds available to finance the project cost are internal sources of funds (or owners' funds) which includes promoter's contribution and retained earnings; and external sources of funds which refers to the borrowed funds in the form of loans from banks, private investors and financial institutions and in the form of debentures from the public 5. While rendering project counseling services, the merchant banker has to ensure that the application forms for obtaining the funds from financial institutions are filled in with relevant and appropriate information 6. Before submitting the application, the merchant banker has to appraise the project considering the various aspects as to the type of the project, location, technical, commercial and financial viability of the project.

Credit Syndication 1. Once the client company has decided about the project proposed to be undertaken, the next step is looking for the sources wherefrom the funds could be procured to implement the project. 2. Merchant banker has to locate the sources of funds and comply the formalities required to proc` ure the funds. 3. This service rendered by the merchant banker in arranging and procuring credit from financial institutions, banks and other lending and investment organizations for financing 4. The clients' project cost or meeting working capital requirement is referred to as loan syndication or credit syndication. 5. Credit syndication in case of domestic borrowings is with the institutional lenders and banks. 6. Long and medium term funds are obtained from the All India Financial Institutions like IFCI, IDBI etc., state level financial bodies like SFC, SIDC etc., commercial banks, mutual funds etc. 7. Short-term funds are also required by the firm for purchase of raw materials, payment of wages, salaries etc. 8. Sources of financing these short term requirements or working capital needs can be from internal sources like internal accruals from working or operations and short term loans from friends and relatives; from external sources like short term borrowings from banks etc.

Issue Management and Underwriting Public issue management involves marketing of corporate securities by offering the securities to the public, procuring private subscription to the securities and offering securities to existing shareholders of the company. Pre issue management 1. To obtain the consent of the stock exchanges to the memorandum and articles of association. 2. Appoint other managers, bankers, underwriters, brokers etc. 3. advice the company to appoint auditors, solicitors and board of directors, 4. draft the prospectus and obtain consent from the companies legal advisors, board of directors and other concerned parties, 5. File the prospectus with registrar, 6. Make an application for enlistment with stock exchanges 7. Finally advertise for the issue. Post issue management 1. A merchant bankers post issue activities include final allotment and/or refund of subscription amount. 2. Calculation of underwriters liability in case of under subscription 3. Complying the necessary statutory requirements for listing of securities on the stock exchange.

Under writing of public issue A fully underwritten public issue spells confidence to the investing public, which ensures a good response to the issue. Keeping this in view companies, which float a public issue usually, desire a full underwriting of the issue. Underwriting is only the guarantee given by the underwriter that in the event of under subscription, the amount underwritten would be subscribed in proportion by the underwriter. An underwriter of the issue gets the following benefits:

It earns a commission of the commitment given. It earns the right to be appointed as bankers of that issue. It expands its clientele by underwriting more and more issues.

Bankers to the Issue The merchant banker can automatically become the banker to the issue in the following cases:

The bank is a broker to the company It has given underwriting commitments. It acts as a manger to the issue The function of a banker to the issue is to accept application forms from the public together

with subscription money and transfer them to the account of the controlling branch.

Portfolio Management Portfolio refers to investment in different types of marketable securities or investment papers like shares, debentures and debenture stocks, bonds etc. from different companies or institutions held by individuals firm or corporate units. Portfolio management refers to managing efficiently the investment in the securities held by professionals to others. Merchant bankers take up management of a portfolio of securities on behalf of their clients, providing special services with a view to ensure maximum return by such investments with a minimum risk of loss of return on the money invested in securities. A merchant banker while performing the services of portfolio management has to 1. enquire of the investment needs of the client, the tax bracket, ability to bare risk, liquidity requirements, etc. 2. they should study the economic environment affecting the capital market, 3. study the securities market and identify blue chip companies in which money can be invested. 4. They should keep record of latest amendment in government guidelines, stock exchange regulations, RBI regulations, etc.

Advisory Services Relating To Mergers and Takeovers A merger is defined as a combination of two or more companies into a single company where one services and other looses their corporate existence. A merger is also defied 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. 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 diversification in production line or business activities, then it will select a nonrelated company as a merger partner. Once the merger partner is proposed the merchant banker has to 1. appraise the merger/takeover proposal with respect to financial viability and technical feasibility. 2. He has to negotiate with the parties and decide the purchase consideration and mode of payment. 3. He has to comply with the legal formalities like getting approval from the Government/ RBI; 4. drafting the scheme of amalgamation; 5. getting approval of company Board, financial institution, high court if required; 6. arranging for the meeting etc.

Book Building
Book-building is a process of price discovery used in public offers. The issuer sets a base price and a band within the investor is allowed to bid for shares. The investor has to bid for a quantity of shares he wished to subscribe to within this band. Book building is basically a capital issuance process used in Initial Public Offer (IPO) which aids price and demand discovery. It is a process used for marketing a public offer of equity shares of a company. It is a mechanism where, during the period for which the book for the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The process aims at tapping both wholesale and retail investors. The offer/issues price is then determined after the bid closing date based on certain evaluation criteria. Book building is basically the process of generating a book of investor demand for an IPO for efficient price discovery. Process 1. The Issuer who is planning an offer nominates lead merchant banker(s) as 'book runners'. 2. The Issuer specifies the number of securities to be issued and the price band for the bids. 3. The Issuer also appoints syndicate members with whom orders are to be placed by the investors. 4. The syndicate members input the orders into an 'electronic book'. This process is called 'bidding' and is similar to open auction. 5. The book normally remains open for a period of 5 days. 6. Bids have to be entered within the specified price band. 7. Bids can be revised by the bidders before the book closes. 8. On the close of the book building period, the book runners evaluate the bids on the basis of the demand at various price levels. 9. The book runners and the Issuer decide the final price at which the securities shall be issued. 10.Generally, the number of shares are fixed, the issue size gets frozen based on the final price per share. 11.Allocation of securities is made to the successful bidders. The rest get refund orders.

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