CHAPTER 1

The Objective of the Study is as follows:

To understand the need and the role played by Merchant banks.
To understand the functioning of Merchant Banks.
Limitatios of the !"oject:
As the scope of Merchant Banking is extremely vast, I have covered a
few important points such as oncept of Merchant Banking, !eed, Importance
and "ole of Merchant Banking, #ualities of a good Merchant Banker, $ome of
the $ervices provided by Merchant Banks, %rganisational setup of Merchant
Bankers in India
1
CHAPTER #
Resea"ch $ethodolo%y
Collectio of &ata
&or the purpose of my study I have collected the relevant data keeping in mind
the aim of my research. I have collected the data from different sources namely
primary and secondary sources.
P"ima"y &ata
The primary data related to the study was collected from'
Books
(ebsites
2
Secoda"y &ata
Besides primary data, I have also collected the secondary data. And the
secondary data was collected from my pro)ect guide and some senior students.
3
CHAPTER '
Coce!t of me"chat ba(i%
The dictionary meaning of merchant bank refers to an organi*ation that
underwrites corporate securities and advises such clients on issues like
corporate mergers, etc. involved in the ownership of commercial ventures. This
organi*ation may be a bank, corporate body, firm or proprietary concern.
The $ecurities and +xchange Board of India has defined merchant banks as ,
any person who is engaged in the business of issue management either by
making arrangements regarding selling, buying or subscribing to securities as
manager, consultant, advisor or rendering corporate advisory service in relation
to such issue management-.
In Indian context this definition suits well. Merchant banking in India started with
the management of public issues and loan syndication and has been slowly and
gradually covering activities like pro)ect counselling, portfolio management,
4
investment counselling and mergers and amalgamation of the corporate firms.
Although, merchant banking organi*ations present a long list of services they
contemplate to render to their clients but the main services so far being
rendered by them are those as authori*ed by the $+BI.
5
CHAPTER )
Histo"y of $e"chat *a(i%
O"i%i of me"chat ba(i%
The origin of merchant banking can be traced back to the ./
th
century
when the development of international trade and finance took place. The early
merchant bankers were traders of commodities. These bankers also acted as
bankers to the kings of +uropean $tates and financed continental wars and
coastal trades. The earlier merchant bankers used to lend their name to the
lesser known traders by accepting bills through which they guaranteed that the
holder of the bill would receive full value on the date of payment. 0ence the
name merchant was used because of its roots in merchant trade.
The %"owth of me"chat ba(i% i +dia
&ormal merchant activity in India was originated in .121 with the
merchant banking division setup by the 3rindlays Bank, the largest foreign bank
in the country. The main service offered at that time to the corporate enterprises
by the merchant banks included the management of public issues and some
aspects of financial consultancy. &ollowing 3rindlays Bank, itibank set up its
6
merchant banking division in .145.The division took up the task of assisting
new entrepreneurs and existing units in the evaluation of new pro)ects and
raising funds through borrowing and e6uity issues. Management consultancy
services were also offered. Merchant bankers are permitted to carry on
activities of primary dealers in government securities. onse6uent to the
recommendations of Banking ommission in .147, that Indian banks should
offer merchant banking services as part of the multiple services they could
provide their clients, $tate Bank of India started the Merchant Banking 8ivision
in .147. In the initial years the $BI9s ob)ective was to render corporate advice
and assistance to small and medium entrepreneurs.
The commercial banks that followed $tate Bank of India were entral
Bank of India, Bank of India and $yndicate Bank in .144.Bank of Baroda,
$tandard hartered Bank and Mercantile Bank in .14: and ;nited Bank of
India, ;nited ommercial Bank, <un)ab !ational Bank, anara Bank and Indian
%verseas Bank in late =45s and early =:5s. Among the development banks,
III started merchant banking activities in .14/ followed by I&I >.1:2? and
I8BI >.11.?.
7
CHAPTER ,
+m!o"tace- .eed ad Role of $e"chat *a(e"s
Important reason for the growth of merchant banking has been
developmental activity throughout the country, exerting excess demand on the
sources of funds for ever expanding industry and trade thus, leaving a widening
gap unbridged 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 re6uirements through
capital issues of e6uity and debentures. (ith the growing demand for funds
there was pressure on capital market that enthused the commercial banks,
share brokers and financial consultant firms to enter into the field of merchant
banking and share the growing capital markets. (ith the result, all the
commercial banks in nationali*ed 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.
8
!otwithstanding the above facts, the need of merchant banking
institutions is felt in the wake of huge public savings lying still untapped.
Merchant banks can play highly significant role in mobili*ing 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. (ith
the growth of merchant banking profession corporate enterprises in both public
and private sectors would be able to raise re6uired amount of funds annually
from the capital market to meet the growing re6uirements for funds for
establishing new enterprises, undertaking expansion or moderni*ation or
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 pro)ects. This is evidenced
from the increasing amount raised form the capital market by the corporate
enterprises year after year.
Merchant bankers, with their skills, updated information and knowledge,
provide service to the corporate units and advise them on such re6uirements to
be complied with for raising funds from the capital market under different
enactments vi*. ompanies Act, Income@tax Act, &oreign +xchange "egulation
Act, $ecurities ontracts >"egulation? Act and various other corporate laws and
regulations.
9
Merchant bankers advise the investors of the incentives available in the
form of tax reliefs, other statutory relaxations, and good return on investment
and capital appreciation in such investment to motivate them to invest their
savings in securities of the corporate sector. Thus, the merchant bankers help
the industry and trade to raise funds and the investors to invest their saved
money in sound and healthy concerns with confidence, safety and expectation
for higher yields.
Role of $e"chat *a(e"
The role of merchant banker is dynamic in the wake of diverse nature of
merchant banking services. Merchant banker9s 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.
0e is always awake to renew his skills, develop expertise in new areas
so as to e6uip himself with the knowledge and techni6ues to deal with
emerging new problems of corporate business world.
0e has to keep pace with the changing environment where government
rules, regulations and politics affecting business conditions fre6uently
changeA where science and technology create new innovations in
production processes of industries.
10
Merchant banker has to think and devise new instruments of financing
industrial pro)ects.
0e 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.
0e has to guide the wider section of the community possessing surplus
money to invest in corporate securities and other productive investment
channels.
0e 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.
0e 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.
0e must bridge the communication gap between different sections and
resolve the problem being faced in different areas concerned with the
business world.
11
In the days ahead, merchant bankers have very significant role to play
tuning their activities to the re6uirements of the growth pattern of the corporate
sector, the industry and the economy as a whole which is, in itself, 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.
12
CHAPTER /
$e"chat *a(i%: Objectives
Merchant Banker plays a vital role in the economic and financial
development of the country. As a result of economic and financial liberali*ation
new companies are formed and number of issues floated to raise resources
from the investor community. onsidering the significance of the issue the
3overnment of India instituted $+BI in .115 to regulate and control various
market intermediaries. $+BI issued various rules and regulations for each and
every segment of the capital market. To regulate Merchant bankers, with the
twin ob)ective vi*., investor protection and development of the capital market,
$+BI issued rules and regulations for Merchant Bankers. $ubse6uent
amendments also have been made to these regulations to further strengthen
this segment of the securities industry. These regulations >Merchant Banking?
specified that every company desires to float an issue to the public should
engage Merchant Banker >"egistered under these regulations with $+BI? as
Bead Manager. In this context Merchant Banker gained the importance in the
Indian $ecurities Industry. In the wake of economic reforms and financial
liberali*ation the need for financial resources has significantly increased. As an
intermediary@Merchant Banker plays a crucial role in exploring the ways and
means for the funds. Besides, issue management, Merchant Banker also
13
performs several other important functions like underwriting of securities,
<rivate placement of securities, corporate advisory services e.g., Takeovers,
Ac6uisitions, 8isinvestments Managing C International offerings of debtDe6uity,
i.e. 38", A8", <rimary dealership of government securities, $yndication of
rupee, term loans, international financial advisory services, etc. which re6uire
special skills.
0aving given a serious and careful thought to securities industry reforms, $+BI
has taken efforts seriously to boost the splendid endeavor of securities market
intermediaries. As a result, Merchant Bankers came into being to look after the
promotion and administration of issues. It is well known fact that without
ade6uate professional support of Merchant Bankers the securities industry
cannot prosper
$e"chat *a(i% fo" +dia: Advata%es
The bane of Indian capital markets today is lack of investor confidence.
This is reflected in the poor performance in the primary and secondary markets.
The cause for the existing situations are many but primarily arise on account of
lack of li6uidity, unscrupulous issuers and Merchant Bankers and poor or
unappeased issues. Merchant banking can solve this problem because
14
investors would be dealing with reputed merchant bankers in the primary
market rather than unknown issuers.
The Merchant Banks, whatever are their issue management techni6ues
have their own capital on hold. The issues are likely to be properly appraised
and priced. Merchant banks would hold the issue until the market conditions
are appropriate for issue, thus reducing risk exposure of investor9s to gestation
for issue. Merchant Banks make the primary market for I<%9s thus assuring
protection to the issuers also about subscription. In sum, the 6uality of pricing
appraisal and primary market functions will improve resulting in substantial
improvement in investor confidence. The necessity of Merchant Banking is
indicated in the view of the wide industrial base of the Indian +conomy.
15
CHAPTER 0
O"%ai1atioal setu! of me"chat ba(e"s i +dia
In India a common organi*ational 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 $BI, anara Bank, <un)ab
!ational Bank, Bank of India, etc. $ome firms are also organi*ed by financial
and technical consultants and professionals. $ecurities and +xchange Board of
India has divided the merchant bankers into four categories based on their
capital ade6uacy. +ach category is authori*ed to perform certain functions.
&rom the point of organi*ational setup India9s merchant banking organi*ations
can be categori*ed into four groups on the basis of their linkage with parent
activity. They are'
2A3 +stitutioal *ase
(here merchant banks function as an independent wing or as subsidiary
of various privateDentral 3overnmentsD$tate 3overnments 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.
2*3 *a(e" *ase
16
These merchant bankers function as divisionDsubsidiary of banking
organi*ation. The parent banks are either nationali*ed commercial bank or the
foreign banks operating in India. These organi*ations have brought
professionalism in merchant banking sector and they help their parent
organi*ation to make a presence in capital market.
2C3 *"o(e" *ase
In the recent past there has been an inflow of 6ualified 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.
2&3 P"ivate *ase
These merchant banking firms are originated in private sector. These
organi*ations are the outcome of opportunities and scope in merchant banking
business and they are providing skill@oriented speciali*ed services to their
clients. $ome foreign merchant bankers are also entering either independently
or through some collaboration with their Indian counterparts. <rivate sector
merchant banking firms have come up either as the sole proprietorship or public
limited companies. Many of these firms were in existence for 6uite some times
before they added a new activity in the form of merchant banking services by
17
opening new divisions on the lines of commercial banks and All India &inancial
Institutions.
18
CHAPTER 4
5ualities of %ood me"chat ba(e"s
Merchant bankers are individual experts who organi*e and manage the
merchant banks. &or the success of merchant banks9 operations, the 6ualities
which merchant bankers should have are discussed below'@
16 Leade"shi! 7 Merchant banker should posses all relevant skills, updated
knowledge to interact with the clients and effectively communicate.
Beadership is synonymous with followers who follow the one who leads.
#6 A%%"essive actio 7 Aggressiveness is a personality trait of a good
leader but in merchant banking it has a wider connotation. Aggressive
merchant bankers are always looking for new business. A good merchant
banker is one who does not allow his client to think anything outside
except what has been advised. Therefore, promptness in grasping the
clients9 problems and providing better choice amongst alternative
solutions evidence aggressive approach in the profession to hold the
client9s interest in entirety for the present as well as the future.
'6 Co8o!e"atio ad f"iedliess 7 !o doubt, these two characteristics
are the symbols of good leadership but it hardly needs to be stressed
that cooperation and friendliness coupled with persuasiveness are the
19
main instruments with which a merchant banker mixes with the people,
gathers information, obtains business mandate and renders satisfactory
services to the clients.
)6 Cotacts 7 $uccess of a merchant banker depends upon his sociable
nature and the richness of wider contacts. The scope of contact
encompasses intimate contiguity and ac6uaintances within his own
organi*ation, entral and $tate 3overnment %ffices where compliances
under various relevant enactments are to be reported, Indian and foreign
banks, financial institutions at entral and $tate levels,
promotersDdirectorsDowners and chief executives of the private and public
enterprises which would be prospective beneficiaries of merchant
banking services.
,6 Attitude towa"ds !"oblem solvi% 7 The most important personality
trait of a merchant banker is his attitude towards problem solving. +very
client coming to him has got to return fully satisfied having consulted a
merchant banker. <ositive approach to understand the view point of
others, their difficulties and their adverse circumstances is possible only
when a person is skilled in human relations particularly the inter@personal
and intra@personal behaviour.
20
/6 +9uisitiveess fo" ac9ui"i% ew s(ills- ifo"matio ad (owled%e
7 Merchant bankers live on the wits they earn by giving information to
needy clients. Therefore, they should keep abreast with latest information
in the area of the service product, they market. This is possible if
merchant bankers posses the 6uality of in6uisitiveness.
!evertheless, merchant banker should possess super business acumen,
managerial abilities, administrative capacities and salesmanship so as to
understand the problems of trade and industry, devise ways and means to sort
out and resolve those problems and sell the service product to the needy
clients.
21
CHAPTER :
Re9ui"emets fo" setti% u! a me"chat ba(i% outfit
16 ;o"matio of the *usiess O"%aisatio
$+BI act, .117 does not prescribe any specific form of business
organi*ation to carry on the activities as merchant banker. 0owever, the
types of organi*ations are listed below'
a? $ole proprietorship
b? <artnership firm
c? 0indu ;ndivided &amily >0;&?
d? orporate +nterprises
e? o@operative $ociety
3enerally it is preferred that the Merchant Banking outfit be a registered
company. Merchant Banks are generally setup as subsidiary companies of
banks ><ublic or <rivate?. &or example, $BI caps, III $ecurities etc.
22
#6 Ado!tio of a viable busiess !la
All the basic tests re6uired to find out whether the business to be
undertaken is viable or not are also applicable to a Merchant Banking setup.
apital ade6uacy, profitability, growth opportunities and current market si*e
are some of the factors which need to be looked into.
23
'6 Re%ist"atio of $e"chat *a(e"s
a) A!!licatio fo" %"at of ce"tificate
b? An application for grant of a certificate needs to be made to $+BI .
In India, merchant banks operate in the form of 8ivisions of Indian and
&oreign banks and financial institutions, subsidiary companies established by
banks like $BI apital Markets Btd., can Bank &inancial $ervices Btd., <!B
apital $ervices Btd., etc. $ecurities and +xchange Board of India >$+BI? has
divided merchant bankers into four categories based on its capital
re6uirements, which are as follows' @
CATE<OR+ES ACT+=+T+ES .ET>ORTH
ategory I
To carry on the activity of issue management
and to act as adviser, consultant, manager,
underwriter, portfolio manager.
"s..crore
ategory II To act as adviser, consultant, co@manager,
underwriter, portfolio manager.
"s.E5 lakhs
ategory III To act as underwriter, adviser or consultant to an
issue.
"s. 75 lakhs
24
ategory IF To act only as adviser or consultant to an issue !il
Merchant Bankers are classified into G categories as shown in the above
table having regard to their nature and range of activities and their
responsibilities to $+BI, investors and issuers of securities. The minimum net
worth and initial authori*ation fee depends on the category. The first category
consists of merchant bankers who carry on any activity of issue management,
determining financial structure, tie@up of financiers, advisor or consultant to an
issue, portfolio manager and underwriter. The second category consists of
those authori*ed to act in the capacity of co@managerDadvisor, consultant, and
underwriter to an issue or portfolio manager. The third category consists of
those authori*ed to act as underwriter, advisor or consultant to an issue. The
fourth category consists of merchant bankers who act as advisor or consultant
to an issue.
To carry on the activity as underwriter or portfolio manager a separate
certificate of registration needs to be obtained from $+BI.
c) A!!licatio to cofo"m to the "e9ui"emets
The application should conform to all the re6uirements under the $+BI
guidelines, otherwise it may be re)ected.
25
d) ;u"ishi% of ifo"matio- cla"ificatio ad !e"soal
"e!"esetatio
The Board may re6uire the applicant to furnish further information or
clarification regarding matters relevant to the activity of a merchant banker for
the purpose of disposal of the application. The applicant or its principal officer
may appear before the Board for personal representation.
e) Coside"atio of a!!licatio
The Board shall take into account for considering the grant of a certificate, all
matters, which are relevant to the activities relating to merchant banker and in
particular the applicant complies with the following re6uirements, namely' @
the applicant shall be a body corporate other than a non@ banking
financial company
the merchant banker who has been granted registration by the "eserve
Bank of India to act as a <rimary or $atellite dealer may carry on such
activity sub)ect to the condition that it shall not accept or hold public
deposit
26
the applicant has the necessary infrastructure like ade6uate office space,
e6uipments, 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 BoardA
the applicant, his partner, director or principal officer is not involved in
any litigation connected with the securities market which has an adverse
bearing on the business of the applicant and have not at any time been
convicted for any offence involving moral turpitude or has been found
guilty of any economic offence
the applicant has the professional 6ualification from an institution
recognised by the 3overnment in finance, law or business management
3rant of certificate to the applicant is in the interest of investors.
f) P"ocedu"e fo" Re%ist"atio
27
The Board on being satisfied that the applicant is eligible shall grant a
certificate. %n the grant of a certificate the applicant shall be liable to pay the
fees as prescribed.
g) Paymet of fees ad the cose9ueces of failu"e to !ay fees
+very applicant eligible for grant of a certificate shall pay such fees in such
manner and within the period specified.
(here a merchant banker fails to pay the Annual fees as provided in $chedule
II, the Board may suspend the registration certificate, whereupon the merchant
banker shall cease to carry on any activity as a merchant banker for the period
during which the suspension subsists.
The Merchant Bank can commence business on ac6uisition of a ertificate of
"egistration from the $+BI after completion of the above mentioned formalities.
28
CHAPTER 1?
Se"vices !"ovided by $e"chat *a(e"s
Issue Management
;nderwriting
Boan $yndication
<ro)ect ounselling
<ortfolio Management
Mergers C Ac6uisitions
Mutual &unds
&actoring
"estructuring service
orporate Advisory $ervices
&actoring $ervices
Asset $ecuriti*ations
&orex $ervices
0ire <urchase
Bease finance
Fenture capital
29
%f the above services, I have discussed some of them in detail below'
30
+SS@E $A.A<E$E.T:
The public issue of securities is the core of merchant banking function.
At one time it was constructed as the sole function. Merchant bankers were
identified as issue houses. It was later perceived that they provide other
financial services. The merchant bankers help corporate to raise money from
the markets through the issue of shares, debentures, bonds etc. They are
designated as managers to the issue. Their main business is to attract public
money to capital issues.
They usually render the following services'
8rafting of prospectus and getting it approves from the stock
exchanges.
%btaining consentDacknowledgement from $+BI.
Appointing bankers, underwriters, brokers, advertisers, printers
etc.
%btaining the consent of all the agencies involved in the public
issue.
0olding road shows, to sell the issue. These shows are held for
the analysts, brokers C institutional investors. The purpose of
these shows is to answer 6ueries from these people about the
company and the pro)ect for which the funds are being raised.
31
8eciding the pattern of advertising.
8eciding the branches where application money should be
collected.
8eciding the dates of opening and closing of the issue.
%btaining the daily report of application money collected at
various branches.
%btaining subscription to the issue.
After the close of the issue, obtaining consent of stock exchange
for deciding basis of allotment etc.
%btaining approval of the institutional underwriters and stock
exchanges for publication of the prospectus.
Corporate advisory services relating to the issue
In India, the pricing of issues is now freely decided by the company, with
valuable inputs from the merchant bankers, who have to sell the issue at the
decided price. The pricing of the issue especially in a public issue is very
important. The pricing has to be such that the investors will be attracted to
invest in the issue at that price, at the same time the company should get the
premium that it is looking for.
32
The promoter also needs to decide whether to go in for a fresh issue or to go for
a rights issue. 0owever this will depend mainly on the 6uantum of funds that
the company needs to raise. The success of the issue is dependent on the
selection of the right type of security. In this matter, the expert advice of
merchant bankers is of immense importance.
In the issue management the merchant bankers have to coordinate the various
agencies to the issue. The success of the issue depends on the cooperation of
all the agencies involved.
ompanies are free to appoint one or more agencies as Managers to an issue.
$+BI guidelines insist that all issues should be managed by at least one
authori*ed merchant banker, functioning either as the sole or lead manager to
the issue. %rdinarily, not more than two merchant bankers should be
associated as lead managers, advisors and consultants to a public issue. In
issues of over "s. .55 crores, the number could be up to a maximum of four.
P"ocedu"e ad ste!s fo" maa%i% !ublic issues could be discussed
ude" two !hases6 They a"e:
33
2A3 P"e8issue maa%emet
2*3 Post8issue maa%emet
2A3 P"e8issue maa%emet
The various steps which are taken in managing capital issues in
general are listed below. The coverage of these activities include all the
activities beginning with the planning of bringing the capital issue till the
opening of subscription list. The steps are as follows'
+6 $teps to be taken by the issuing company.
++6 $teps to be taken by lead manager to the public issue.
+6 Ste!s to be ta(e by the com!ay:
Before going public the company has to take steps to ensure on its part
compliance of certain formalities. These formalities are'
34
13 Plai% the ca!ital issue 7 The ompany has to assess its re6uirements for
the funds to be raised from the public. The re6uirement should be assessed
with reference to the balanced capital mix between the owners9 funds and the
borrowed funds and be based on the capital structure of the company. In case
the company has availed of the services of merchant bankers for corporate
counselling or pro)ect counselling then the merchant banker could advise the
company over this aspect. Another aspect to be taken care of while planning
the capital issue is the type of securities to be issued. Trend of public response
for e6uity capital and debenture should be considered.
2#3 Choice of a me"chat ba(e" to act as a lead maa%e" ad selectio
c"ite"ia 7 The next step is to select a merchant banker to act as a lead manager
and the selection criteria for this comprises of the following elements'
The ability of the merchant banker to sell the issue to the investors.
The status and organi*ational competence of the merchant banker and
infrastructure available with it to manage the public issue effectively.
The efficiency in service provide by the merchant bankers through well
informed, skilled and expert man@power it employs.
35
The confidence that a company can have in the merchant banker to
avail of the assistance in the odd circumstances and unfavourable
market situation.
The merchant banker to be appointed as lead manager to public issue
should be the one having authori*ation from $+BI.
Also the company will appoint the lead merchant banker to the proposed issue
as per the provisions of $+BI >Merchant Bankers? "egulation. The issuer
company is also re6uired to enter into a formal agreement with the lead
merchant banker as per the re6uirement of the regulation.
2'3 .umbe" of co8maa%e"s to the issue 7 The number of lead merchant
bankers should not exceed in case of any of the following issues'
Si1e of the !ublic issue
2Rs6 i c"o"es3
.umbe" of Lead $e"chat *a(e"s
Bess than "s.E5 crores Two
"s.E5 crores but less than "s.55
crores
Three
"s..55 crores but less than &our
36
"s.755 crores
"s.755 crores but less than
"s.G55 crores
&ive
"s.G55 crores and above &ive or more as may be agreed by
the $+BI
2++3 Ste!s to be ta(e by lead maa%e" to the !ublic issue fo" ew
com!aies- "i%hts issue o" dilutio sha"es fo" eAisti% com!aies 7 %nce
the company has appointed lead manager to the public issue, its executives
work in close coordination with the lead merchant banker. In case, there is more
than one lead manager, the role to be played by each of the lead managers is
discussed and the work relating to issue management could be allocated
amongst them keeping in view their respective expertise and resourcefulness in
the specific area. $uch merchant banker will be responsible and accountable
for all matters related to the specified and accepted roles. Bead merchant
bankerDs hasDhave to plan the public issue activities through a schedule listing
the activities to be performed and the time@frame within which each activity has
to be performed and completed. A specimen activity schedule which is generally
prepared by lead managers to the issue is given as check@list. The ma)or
activities to be performed by the merchant bankers are as follows'
37
16 Stoc( eAcha%e a!!"oval6
#6 Coside"atios "e%a"di% the ade9uacy of ca!ital- balaced ca!ital
st"uctu"e- debt8e9uity "atio ad !"efe"ece e9uity "atio6
'6 Ta(i% actio as !e" SE*+ %uidelies 7 "e6uirements for capital
issues under the $+BI guidelines are listed below'
a3 &resh issue of capital to public' e6uity shares and preference
shares.
b3 "ights issueDpublic issue by existing listed companies.
c3 Bonus issue.
d3 8ebenture issue.
e3 <ublic sector bonds.
f3 <ublic issues by financial institutions.
)6 ;ialisi% a!!oitmet of diffe"et a%ecies 7 The various agencies
which are to be appointed for the management of capital issues are
re6uired to be registered with $+BI. The various agencies to be
appointed by the lead managers are as follows'
a3 Appointment of underwriters to the issue.
38
b3 Appointing brokers for selling the issue.
c3 Appointment of bankers to the issue.
d3 Appointment of registrars to the issue.
e3 Appointment of printers.
f3 Appointment of advertising agency.
,6 A!!oitmet of othe" a%ecies 7 The merchant banks may also
advise the company that in addition to the above agencies it may also
appoint the following persons involved in the public issue'
a3 Auditors of the company.
b3 $olicitorsDAdvocate as legal advisors to the public issueDissue
of prospectus.
c3 Broad base the Board of 8irectors so as to nominate
prominent parties in India or abroad on its Board.
/6 &"afti% of !"os!ectus 7 <rospectus is an important document upon
which the investors rely, repose confidence in the company and invest
their savings in subscribing to the capital of such offering company.
06 A!!"oval of !"os!ectus by diffe"et a%ecies6 They are as follows'
39
a3 Begal advisor.
b3 Auditors.
c3 o@managers to the issue.
d3 Institutional underwriters.
e3 $+BI clearance to prospectus.
f3 Approval of stock exchanges to the draft prospectus.
46 Actio to be ta(e by the com!ay
a3 Board of directors meetings.
b3 Making application to stock exchanges for permission.
c3 &iling prospectus with "egistrar of ompanies.
d3 &orwarding copy of the prospectus to $+BI.
e3 Appointment of underwritersDbrokers by the board.
:6 P"iti% ad dis!atch of issue mate"ial 7 %n receipt of the
acknowledgement of the prospectus from the "egistrar of ompanies
the printing of prospectus, application forms, brochure, press release
and other material should start. Both printers and advertising agency
40
should coordinate to get efficiency and economy of time and money.
The merchant bankers should go through the final proof of the entire
issue material before printing starts. The application form, brochure and
press releases as designed by advertising agency should be approved
by managers to the issue before the company gives print orders to
avoid errors and discrepancies.
1?6 Publicity cam!ai% 7 The publicity campaign for the public issue may
be organi*ed with a view to make the investors aware of the opening of
the public issue, inform them about the company bringing out the public
issue, its promoters9 background and creditability, status of the pro)ect
to be financed out of the public issue, the marketability of the product to
be manufactured or service to be provided by the company and the
future profitability pro)ection to enable the investors to make their
independent )udgements about the future of the company and the
money they may decide to invest in the company by subscribing to its
shares.
a3 Advertisements.
b3 (rite@upsDreporting about the companyDits promoters in
economic )ournals.
41
c3 0olding pressDbrokersDinvestors conferences at prominent
centres.
116 +st"uctios to ba(e"s 7 Bankers to the issue designate their
branches, as collection centres keeping gin view the general response
of the investors, location of the pro)ect, expectation of regional support
from the public, their past performance in the area, facilities available in
their branches to handle the collection of public issue applications.
These branches work under the directions of a controlling branch or
pooling centre.
1#6 O!ei% of the subsc"i!tio list 7 All canvassing about the issue
stops from the day of prospectus announcement in the newspapers
which is done ten days before the issue is opens. All collecting centres
display with posters and banners availability of application forms and
make arrangements for the convenience of the investors to receive the
application form with application money.
2*3 Post8issue maa%emet 7 3eneral public becomes entitled to subscribe
to the sharesDdebentures of the issuing company on the day the subscription
list opens as announced in the prospectus or other offer documents and the
statutory advertisement.
42
16 ;i"st day "es!ose 7 The response on the first day is a fair indication of
the success or failure of the public issue of securities. 3ood issues may
get over@subscribed on the first day itself. But this will depend upon the
efforts made to sell the issue, the investor9s mood with bullish spiral
prevalent on the stock market on the opening day and the existing and
near future economic, social, political and business environment.
#6 Commuicatio chaels du"i% the issue !e"iod 7 Merchant
bankers. Brokers, underwriters, bankers and the company all are eager
to know the exact figure of applications received for subscription and the
money collected thereof. The collecting branches of the bankers which in
turn provide the information to the "egistrars, Managers and the
company as per the communication channels depicted in the module
given below' @
43
'6 Brokers and underwriters are getting information from managers or the
concerned company about the subscription to the issue. &or effective
and immediate collection of information the representatives of "egistrars
sit with the controlling branch and collect information from banks
collection centres is passed on to controlling branch of the bank.
44
Managers to the
issue
The Issuing
Company
Registrars to the
Issue
Controlling
Branch Bank A
Controlling
Branch Bank B
Controlling
Branch Bank C
Bank A
Collection Centres
Bank B
Collection Centres
Bank C
Collection Centres
Communication Module
)6 +fo"matio f"om the issue 7 "egistrars, interact with merchant
banksDmanagers and send centre@wise information to them from time to
time.
,6 .aBve aalysis of collectio 7 Merchant bankers managing the issue
make through estimate of the collections and assess the progress of
subscription following the AB analysis. &or the purposes of the
collection money the important towns which show better collections are
put in category A. in these towns collection is made upto :5H of the total
amount. These are five towns 8elhi, Mumbai, alcutta, Madras and
Ahmedabad. If on the first day of opening of the issue collections come
upto 75H in any of these towns then exploration is done to forecast the
total subscription. This is done by multiplying the number of these five
prominent centres by 75H i.e. 75H x E I .55. This shows that the issue
will get over subscribed. ategory B towns which contribute only 75H to
the issue will collect some money too, that will be added to the figures.
ategory towns may not collect any amount but if any amount is
collected it will be further added to the total sum. Thus, the rough
estimate is made about the collections. "egistrar to the issue monitors
progress in category A towns to pass on the actual collection figures to
the managers.
45
/6 Closu"e of the subsc"i!tio list 7 $ubscription list is open for minimum
period of three days and maximum period of .5 working days as
approved by the stock exchanges. The period is extended from minimum
to maximum when the issue remains under@subscribed. In other words,
the closure of the issue is made on the final date shown in the
prospectus for closing of subscription list.
06 Ove"8Subsc"i!tio 7 "etention of over@subscription of e6uity or
debenture is now not allowed by $+BI. !o doubt over@subscription
reflects the popularity and image of the company in the eyes of investors,
but it also adds to costs of handling of the issue. A company used to be
allowed by the ontroller of capital Issues to retain 7EH of the over@
subscription of e6uity and E5H of debentures if announced by it in the
prospectus or statement in lieu of prospectus or letter of rights offer. This
percentage was reduced on uniform basis to .EH both for shares and
debentures in public and rights issue. The company could retain the
over@subscription to the prescribed extent of the total share capital
inclusive of the over@subscription, provided it did not exceed "s.. crore
without permission of ontroller of apital Issues.
46 $iimum subsc"i!tio i !ublicC"i%hts issues 7 The entral
3overnment has decided that from April 1, .115, a company making any
rights or public issue of securities will be allowed to allot shares and
46
debentures only if it has received a minimum of 15H subscription against
the entire issue. If the re6uired amount is not received, the application
money will have to be refunded to the applicants at the end of 15 days
from the closure of issue. This is one to protect the interest of investors
particularly in under@subscribed capital issues.
:6 @de"8subsc"i!tio 7 ;nder subscription does not render all persons
happy. It causes devolvement upon underwritersDsub@underwriters.
0aving guessed under@subscription, underwriters, especially financial
institutions should make application to populari*e the issue and ensure
maximum subscription from the public. According to the $+BI guidelines,
if a company does not receive 15H of issued amount from public
subscription plus accepted devolvement from underwriters, within .75
days from the date of opening of the issue, the company shall refund the
subscription if the above conditions are not met.
1?6 P"ocessi% of data 7 "egistrar to the issue or issue@house commences
processing of the data on computer or manually as the case may be, on
receipt of applications from different centres. Ferification of each and
every application is made with reference to the amount on application,
correct name, age, address and occupation of subscriber, signatures of
the subscriber>s?. In the case of !"I subscribers verification is made with
reference to entral 3overnment stipulations under &+"A. Applications
47
made under power of attorney are accompanied with respective power of
attorney document which has to be verified. !o applicant, it is ensured is
a fictitious person. 0aving ascertained and verified all these above facts,
applications are serially numbered for 6uick identification and future
reference. By using computer systems the processing is done fast.
116 SE*+Ds %uidelies 7 To monitor the post@issue process, obligations have
been placed upon lead merchant bankers to strictly supervise and follow@
up the post@issue activities and periodically report to $+BI the progress
in the matters of allotment and refunds as noted below' @
i6 4 days reporting from closure of issue J Bead managers to confirm
to $+BI that the issue is subscribed to the extent of 15H within 4
days from the date of the closure of the issue.
ii6 GE days reporting from closure of issue J This is compliance report
to be sent to $+BI. In this report lead manager shall also include if
the company was permitted by stock exchange to utili*e the funds
on receipt of 15H subscription.
iii6 "eport on the basis of allotment.
iv6 15 days final report J $+BI vide its letter to all merchant bankers on
Kuly 2, .11/ has amended the ompendium of irculars wherein it
48
has prescribed a complete reporting system for subscribed public
issues, unsubscribed public issues, subscribed right issues and
undersubscribed right issues in the prescribed performance.
1#6 @de"8subsc"i!tio ad ude"w"ite"s liability 7 ;nder@subscription of
the issue causes difficulties for the company and underwriters. "egistrars
advise the company to call upon the underwriters to fulfill their
commitments. ;nderwriter9s liability is decided by deducting the total
number of shares underwritten to the extent of deficiency, he has to be
liable. In case any particular underwriter has procured ade6uate number
of shares, he incurs no liability>atch o defaulti% ude"w"ite"s 7 In
order to keep a close watch over such underwriters who have failed to
meet their underwriting devolvement and to consider penal action
against such underwriters and debar them from underwriting public
issues in future, the merchant bankers are re6uired to provide
information to $+BI in the below given format beginning from Kuly, .11/'
!ame of the merchant banker
!ame of the issuer company
Issue si*e
49
1'6 *"id%e loa f"om istitutioal ude"w"ite"s a%aist !ublic issue of
sha"es 7 &inancial institutions provide bridge loan to the company to the
extent of E5H of their underwriting commitments which has demand
character, to be ad)usted on allotment. To avail of the amount of bridge
loan the company has got to notify in the prospectus its intentions.
1)6 &evolvemet ad commitmet of ude"w"ite"s 7 Institutional
underwriters including banks should be immediately contracted by the
company through its Mangers to put in the application to the extent of
devolvement. The underwriter Banks should be approached in writing
with the following documents enclosed.
Auditors ertificate showing that the promoters and their
associates have contributed their share of contribution in the
e6uity capital of the company in terms of the prospectus.
Auditors9 ertificate explaining that the obligation of underwriters
in respect of contingent underwriting have been duly fulfilled by
the underwriters.
$tatement of underwriters obligations showing therein the extent
of devolvement upon institutionsDbanks, which has also got to be
verified by the auditors.
50
@de"w"iti%
$eai%
The word =underwriting9 was coined by British Merchants who used to write their
names at the end of marine insurance document wherein each agreed to
assure )oint risk.
The dictionary meaning of underwriting is =to agree to sell bonds, etc. to the
public, or to furnish the necessary money for such securities and to buy those
which cannot be sold9.
;nderwriting is an important primary market activity performed by stock
brokers, merchant bankers and underwriters approved by $+BI for this
purpose. It is related to marketing and merchant banking for an issue. The
industry positions are measured by the amount of underwriting one does.
;nderwriters are distributors for the financial products@ assuring a sale and if
the sale does not actually take place, they agree to pick up the residual. It is an
assurance against the possible failure of the issue and the underwriters have to
step in if the issue remains under subscribed to the extent of the amount
underwritten. If the market does not take the share, it is an indication of
overpricing of scrip. As such, the underwriter exposes himself to risk on account
of fall in market price and blockening his funds.
51
;nderwriting offer is similar to insurance business, where the insurer is exposed
to risk to the extent of amount insured, but the only game is the insurance
commission. In underwriting, the compensation is underwriting commission. The
underwriting decision is evaluation of risk and probable loss which can also be
reduced by sub@underwriting.
In India underwriting commission is regulated by statute at a maximum of 7.EH.
$imilarly, the entry into this business is also regulated by $+BI thereby only
$+BI registered agencies can act as underwriters. These are'@
.. ategory .,7 C / Merchant bankers.
7. ;nderwriters.
/. $tockbrokers.
@de"w"iti% ad SE*+ %uidelies
According to $+BI guidelines on investor protection and disclosure dated
..D52D.117, underwriting was mandatory for the full issue amount for each issue
of capital to the public. This has since been relaxed in view of high costs
involved and now the underwriting is optional.
The lead managers are re6uired to satisfy themselves that the financial of the
underwriters are ade6uate for them to undertake their underwriting
commitmentsA such opinion has to be included in the prospectus also.
52
@de"w"iti% a%"eemet
To avoid disputes between the underwriters and Issuer ompany, $+BI has
formulated a model underwriting agreement which seeks to standardi*e the
legal relationship between the two parties. It provides clear guidelines for
resolving the issues of disputes. It stipulates several norms for interest of both
the parties including the time limit within which the issue should open from the
date of agreement i.e. three months.
The practice in our country is that lead managers obtain blank and undated
consents from the underwriters which the underwriters do in order to get the
business and there have been cases where the issues really came even after
one year of sending consents.
The underwriters shall be entitled to appoint sub@underwriters but the main
underwriter will be primarily responsible. The underwriters are also asked to
produce a statement of devolvement of issues and a statement of declaration of
net worth alongwith hartered Accountant9s ertificate at the time of sending
consents. All underwriters who are members of recogni*ed stock exchanges
have also to obtain permission to act as underwriter from their $tock +xchange.
;nderwriting agreement is a legally enforceable contract between a company or
an issuer and the underwriter. There is no legal difference between underwriting
and contingent underwriting as all underwritings are dependent on a
53
contingency. $ometimes, a company enters into a standby arrangement
whereby there is an agreement between the company and an undertaker who
agrees to apply for shares, if not subscribed by public. This is also an
underwriting agreement.
Evaluatio by ude"w"ite":
$ince the underwriter9s contingent stake is involved in any issue, it is desirable
for any underwriter to evaluate the pro)ect or issue before consenting to act as
an underwriter. 0e should stress upon following points while deciding whether
to underwrite and how much to underwrite.
16 ompany9s standing and past track record
#6 Management of the company, competence of promoters and
professional approach.
'6 %b)ects of the proposed issue.
)6 <ro)ect details, means of finance, pricing and marketing.
,6 &oreign participation in technology, finance and management.
/6 <rice of the issue and listed price of company9s shares or of other
companies in industry.
06 <ending disputes and litigations.
54
46 $tatutory clearances.
:6 &inancial institution9s loans and participation in e6uity.
>hat the com!ay loo(s fo" i ude"w"ite"s:
The companies or their lead managers appoint underwriters on the basis of
their standing in the market and past experience as to procurement and
honouring of commitments.
The ma)or points that are looked into are'@
16 &inancial strength of the underwriters.
#6 +xperience in primary market.
'6 <rimary market network.
)6 <ast performance and procurements.
,6 %utstanding underwriting commitments.
Sub8ude"w"iti%
The underwriter shall be entitled to arrange for sub@underwriting of his
underwriting obligation on his own account with any person, broker or
55
underwriter on terms and conditions to be agreed upon between them.
!otwithstanding any such sub@underwriting arrangement, the main underwriter
only shall be primarily responsible for sub@underwriting and any failure or
default on the part of sub@underwriters to discharge their respective sub@
underwriting obligation, shall not exempt or discharge the underwriter of his
underwriting obligation to the company.
(herever such arrangements are done, it should be informed to the company,
lead managers and concerned stock exchanges.
56
Loa Sydicatio
Boan syndication or credit syndication refers to the services rendered by the
merchant bankers in arranging and procuring credit from financial institutions,
banks and other lending and investment organi*ations for financing the clients
pro)ect cost or meeting working capital re6uirements. In other words, it is a
pro)ect finance service. In se6uence of merchant banking services it ranks next
to pro)ect counselling.
%nce the client company has decided about the pro)ect proposed to be
undertaken, the next step is looking for the sources from where funds could be
procured to implement the pro)ect. The responsibility of locating the sources of
finance, approaching these sources by putting in re6uisite prescribed
applications and complying with all formalities involved in the sanction and
disbursal of loan rests with the merchant bankers who provide the service
loanDcredit syndication.
Ste!s i Loa sydicatio:
16 <reparing pro)ect details and estimating capital re6uirements of the
applicant.
#6 Bocating sources of finance i.e. the lenders or supplier of funds.
57
'6 $election of suppliers of funds. <reliminary discussions with the suppliers
of funds to ascertain possibilities of getting credit.
)6 <reparation of loan application.
,6 &iling the loan application with the financial institutionDbank and follow@up
action.
/6 "endering assistance in pro)ect appraisal with the financial
institutionDbank.
06 %btaining sanction letterDletter of intent from the lenders.
46 Assistance in compliance of terms and conditions for the availment of the
loan.
:6 Assistance in documentation and creation of security.
1?6 Assistance in obtaining disbursement of loan.
Boan syndication in the case of domestic borrowing is undertaken with the
institutional lenders and the banks. Amongst institutional lenders the following
institutions are the main suppliers of the long and medium term funds with
which the merchant bankers contact, liaison, and arrange loans for and on
behalf of their clients.
16 All +dia ;iacial +stitutios:
58
i. Industrial &inance orporation of India >I&I?
ii. Industrial 8evelopment Bank of India >I8BI?
iii. Industrial redit and Investment orporation of India Btd. >III?
iv. Industrial "econstruction Bank of India >I"BI?
v. $hipping redit and Investment ompany of India Btd. >$II Btd.?
#6 State Level ;iacial *odies:
i. $tate &inancial orporations >$&s?
ii. $tate Industrial 8evelopment orporations >$I8s?
iii. $tate Industrial and Investment orporations >$IIs?
'6 All +dia Level +vestmet +stitutios:
i. Bife Insurance orporation of India >BI?
ii. ;nit Trust of India >;TI?
iii. 3eneral Insurance orporation of India >3I? and its subsidiary
companies.
59
)6 Comme"cial *a(s:88 ommercial banks )oin consortium financing with all
India financial institutions to provide medium term loan to industrial pro)ects,
otherwise they cater to the needs for working capital re6uirements.
,6 $utual ;uds
/6 =etu"e Ca!ital ;uds
60
P"oject Couselli%
<ro)ect counseling is very important and lucrative merchant banking service
which only very few merchant bankers having advantages of knowledge, skills
and experience over others are able to render satisfactorily.
P"oject "e!o"t 7 its meai% ad eed
The dictionary meaning of the word =pro)ect9 is =plan9, =scheme9, =course of
action9 etc.
The above meaning of the pro)ect is acceptable from merchant banking point of
view. But merchant bankers may contribute to the basic idea which a promoter
initially picks up for the proposed industrial activity.
Merchant bankers advise the clients on pro)ect preparation. Thus, two reports
vi*. technical feasibility report and the market survey report must be prepared
61
separately. Farious agencies, at different levels, evaluate these two reports to
extract the desired information for taking decisions.
P"oject "e!o"t !u"!oses 7 <reparation of pro)ect report is necessary for the
following purposes J
;o" obtaii% %ove"met a!!"ovals J 3overnment has put restrictions on
taking up certain economic activities without its prior approval. Most of these
restrictions have been placed to ensure that economic activity conforms to the
basic norm of planned way where scarce resources of the nation could be put
to better utili*ation for producing goods and services. <ro)ect report about the
proposed activity is prepared to obtain government approvals particularly in the
following areas'
3rant of industrial licence to undertake specified industrial activity.
&oreign investment and technology tie@up.
3rant of import licence for importing raw material, plant, machinery and
e6uipments.
3rant of foreign exchange allocation for import of capital goods or raw
materials etc.
62
3rant of subsidies and other concessions from the government at centre
or state levels or from government sponsored agencies, etc.
;o" !"ocu"i% fiacial assistace f"om diffe"et fiacial istitutios-
ba(s ad !ublic sou"ces 7 &inancial institutions and banks grant term loans
and working capital limits respectively to the business enterprises on the basis
of the re6uirements pro)ected and )ustified in the pro)ect report. &or procuring
public subscription towards e6uity it is necessary to convince the investing
public about the technical feasibility and economic viability of the pro)ect from
practical as well as from legal angle to )ustify the financial re6uirements and
comply with various statutory formalities for which the pro)ect report is needed.
;o" !laed im!lemetatio of actio !la o" !"oject 7 <ro)ect report
enables a company for planned utili*ation of resources and implementation of
the pro)ect within scheduled time.
;o" esu"i% ma"(et fo" the !"o!osed !"oduct 7 <ro)ect report presents
integrated aspects about the product being proposed to be produced and to
explore market for it. Market survey reports are part of the pro)ect report.
<roduct, in real sense, is known only through market survey, which provides
information about the existing as well as the future demand for the product.
$uch market explorations provide information about end users of the product,
segments of the market for promotional efforts as well as for pricing decisions.
63
;o" esu"i% s!ecified techical !"ocess ad e%iee"i%
"e9ui"emet fo" maufactu"e of the !"oduct 7 ost of the pro)ect is affected
by the technical process involved in production of the desired goods. <ro)ect
report describes the technical process. Technical process suggests for suitable
location of pro)ect site, si*e of plant, re6uirement of raw material, labour and
skills, power, fuel, water, effluent treatment and degree of pollution control,
transportation, etc. <ro)ect report provides all these details for taking 6uick
decision on its implementations.
Sco!e of !"oject couselli% se"vices 7 <ro)ect counselling services
are needed by industrial entrepreneurs in India in the following areas'@
16 <reparation of pro)ect report.
#6 8eciding upon the financing pattern to finance the cost of the pro)ect.
'6 Aspects of pro)ect appraisal with financial institutionsDbanks.
P"e!a"atio of !"oject "e!o"t:
<reparation of pro)ect report involves pre@investment study of the proposed
production activity from different angles including the following'@@
64
213 Plai% of objectives 7 <lanning of ob)ectives of the proposed activity is
essential from different angles.
2#3 Evaluati% the !la objective 7 The above ob)ectives and targets should
be evaluated individually on consideration of the following aspects by the
promoters of the pro)ect themselves or through the help of the merchant
bankers or other professional consultants'
2'3 Evaluate activity havi% idetified the objectives 7 This is to be done
with reference to re6uirements of the following elements'
i6 Technical know@how and other re6uirements.
ii6 <lant and e6uipment.
iii6 Manpower re6uirements for both skilled and non@skilled.
iv6 &inancial re6uirements.
v6 Managerial competence and organi*ational set@up.
i. 2)3 Ta(e a decisio whethe" o" ot to ude"ta(e the !"oject idea 7
Merchant bankers, wile giving suggestions or opinions on the above
aspect are guided by their own experience and professional skills
attained over the years of their practice and experience in the field work.
65
2,3 ;o"mat of the !"oject "e!o"t 7 !o format of pro)ect report is prescribed.
<ro)ect report for different products involving different technical process will
contain information best suited to the manufacturing process of each of such
products. But there are certain aspects which are common in all pro)ect reports.
These aspects are discussed below'
i6 <roduct
ii6 apacity
iii6 Technical process
iv6 $chedule of implementation
v6 ost of the pro)ect
vi6 Market study
2/3 &ecidi% u!o the fiacial !atte" 7 ;iaci% the !"oject cost 7
Important aspects of pro)ect counselling is the planning for raising funds
re6uired to finance the pro)ect cost. Apparently there are two sources of funds
available to finance the pro)ect cost vi*. internal sources and external sources.
Internal resources refer to owners9 funds whereas external sources are
borrowed funds. Internal source of funds could be the owners9 funds retained in
66
the company in the form of reserves and surpluses or provision for depreciation
or retained earnings.
+xternal finance is in the form of loans from banks, private investors and
financial institution. Boans may be short@term and long@term for periods. These
loans are raised as borrowings from the banks and term lending financial
institutions. ompany may burrow from public by way of public issues through
prospects or private investment institution in the form of debentures at fixed rate
with different conditions of convertibility, non@convertibility and redemption.
Based on the above background the pro)ect cost of a company is financed as
per the following pattern'
$eas of fiaci% the !"oject cost:
13 Sha"e ca!ital 2owe"s fuds3E adCo"
+6uityD<references shares
Indian promoters
!on@resident Indians
<ublic issue
#3 Te"m loas 2bo""owed fuds3E adCo"
67
"upee loan or foreign currency loan from financial institutionsDbanksA
onvertible debentures or non@convertible debentures from public issue or
private placement with investment institutionsA
;nsecured loansDdepositsA Bease financing
2'3 SubsidiesE adCo"
2)3 +te"al cash acc"uals6
68
Po"tfolio $aa%emet
<ortfolio management is a way of handling client9s investments in order to gain
returns. The main ob)ectives of portfolio management sought to be achieved by
the merchant bankers for their clients include the following'
Safety of ivestmet o" fuds 7 The investment should be preserved, not be
lost and remain in a returnable position in cash or kind.
$a"(etability 7 The investment made in securities should be marketable i.e.
the securities must be listed and traded at the stock exchange so as to avoid
difficulty in their encashment.
Li9uidity 7 The portfolio must consist of such securities which could be
encashed without any difficulty or involvement of time to meet urgent need of
funds. Marketability ensures li6uidity of the portfolio.
Reasoable "etu" 7 The investment should earn a reasonable return to
upkeep the declining value of money and be compatible with opportunity cost of
the money in terms of current income in the form of interest or dividend.
A!!"eciatio i ca!ital 7 The money invested in portfolio should grow and
result in capital gains.
69
TaA !lai% 7 +fficient portfolio management is concerned with composite tax
planning covering income@tax, capital gains tax and wealth@tax.
Ris( avoidace 7 "isk avoidance and minimi*ation of risk are important
ob)ectives of portfolio management. <ortfolio managers achieve these
ob)ectives by effective investment planning and periodical review of the market
situation and economic environment affecting the financial market.
;uctios of Po"tfolio maa%e"s
Merchant bankers and portfolio managers rendering the services of portfolio
management to their clients in different categories vi*. individuals, resident
Indians and non@resident Indians, firms, association of persons, like )oint 0indu
family, trust, society, corporate enterprises, provident fund trustees, etc. have to
en6uire of their respective individual ob)ectives, need pattern for funds,
perspective towards growth and attitude towards risk before counselling them
on the sub)ect and acceptance of the assignment. !evertheless, the portfolio
managers in the wake of rendering this service perform following set of
functions'@@
16 8oing complete study of economic environment affecting the capital
market in the country covering important aspects of international
economic situation likely to affect the money, capital or securities
markets.
70
#6 $tudying the securities market and evaluate price trends of different
types of securities 6uoted at stock exchange and identify the blue@chip
companies securities where investors could be advised to invest their
money for better and safe investments.
'6 Maintaining complete updated financial performance data of the blue@
chip companies and other good companies where investment could be
made. "ecord should be maintained in a systematic way with ratio
analysis about debt@e6uity, rate of profitability and dividend payout ratio,
earning per share, dividends during the past two years, retained income
growth rate, capital nature of securities issued, bonus and right issue
details, market performance of securities and current prices, speculative
nature of the security, etc
)6 Leeping record of latest amendment in government guidelines, stock
exchange regulations, "BI regulations over bank lending against
security of shares, loans to invest in shares of new companies, tax
incentives for investment in corporate securities, policy towards !"I9s
investments, foreign capital inflow and repatriation restrictions, etc.
,6 $tudying problems of industry affecting securities market attitude of
investors.
71
/6 $tudying the behaviour pattern of financialDinvestment institutions and
banks, their policy structure towards investment, their funds position and
li6uidity re6uirements. Leeping latest and detailed information about the
moves of these institutions will help in managing risk of investment or
price change of securities affected by sale and purchase activities to
these financial institutions.
06 $tudying the attitude and behaviour pattern of brokers9 community
dealing in different stock exchange, their expectations, manipulative
practices, etc.
46 ounselling the prospective investors on share market and suggest
investments in certain assured securities.
:6 arrying out investment in securities or sale or purchase of securities on
behalf of their clients to attain maximum return at lesser risk.
<ee"al "es!osibilities of Po"tfolio $aa%e"
The general responsibilities for the discretionary portfolio manager as well as
the portfolio manager have been specified in regulation .E of the $+BI ><ortfolio
Management? "egulations, .11/ that are summari*ed below'
72
16 0e shall transact in securities within the limitations placed by the
client himself with regard to dealing in securities under the provisions
of the "eserve Bank of India Act,.1/G >7 of .1/G?A
#6 0e shall not derive any direct or indirect benefit out of the clients
funds or securitiesA
'6 0e shall not pledge or give on loan securities held on behalf of clients9
to a third person without obtaining a written permission from his
clientA
)6 0e shall ensure proper and timely handling of complaints from his
clients and take appropriate action immediatelyA
,6 0e shall abide by the code of conduct.
*asic !"ici!les of !o"tfolio maa%emet
There are two basic principles, given below, for effective portfolio management'
16 +ffective investment planning, and
#6 onstant review of investment.
16 Effective ivestmet !lai%
73
Merchant bankers rendering the service as portfolio managers plan for the
investment in securities by considering the following factors'
i. &iscal, financial and monetary policies of the entral 3overnment or
"eserve Bank of India.
ii. Industrial and economic policy of the 3overnment and their impact on
industry prospects in terms of prospective technological change,
competition in the market, capacity utili*ation in the industry, demand
prospects, etc.
#6 Costat "eview of ivestmet
Merchant bankersD portfolio managers should constantly review their
investments in securities and continue selling and purchasing to change
investments in more profitable avenues. &or this purpose it is necessary to
carry on the following analysis'@
i. Assessment of 6uality of management of the companies in which
investment has already been made or is planned to be madeA
ii. &inancial analysis and trend analysis of companies balance sheetsDprofit
and loss accounts to choose more sound companies with optimum
capital structure and better performance and off@load investment made in
companies with slackening performanceA
74
iii. Analysis of securities market trend is done on a continuous basis.
75
$e"%e"s ad Ac9uisitios
Business combinations are known by different names vi*. mergers,
consolidations, takeover, amalgamations, and ac6uisitions. Meanings of these
terms should be understood as some of these terms carry different meanings in
different situations. &or example, the meaning of the word ,combination- it
refers to mergers and consolidation as a common term used interchangeably
but carrying legally distinct interpretation.
$eai% of te"ms:
$e"%e" 7 Mergers is defined as a combination of two or more companies into a
single company where one survives and the others lose their corporate
existence. The survivor ac6uires the assets as well as the liabilities of the
merged company or companies. 3enerally, the company which survives is the
buyer which retains its identity and the seller company is extinguished. Merger
is also defined as amalgamation. Merger is the fusion of two or more existing
companies. All assets, liabilities and stock of one company stand transferred to
Transferee ompany in consideration of payment in the form of e6uity shares of
Transferee ompany or debentures or cash or mix of the two or three modes.
Amal%amatio 7 %rdinarily amalgamation means merger. Both the terms are
used interchangeably.
76
Cosolidatio 7 onsolidation is known as the fusion of two existing
companies into a new company in which both the existing companies
extinguish. Thus, consolidation is mixing up of the two companies to make them
into a new one in which both the existing companies lose their identity and
cease to exist. The mix@up assets of the two companies are known by a new
name and the shareholders of two companies become shareholders of the new
company. !one of the consolidating firms legally survive. There is no
designation of buyer and seller. All consolidating companies are dissolved. In
other words, all the assets, liabilities and stocks of payment in terms of e6uity
shares or bonds or cash or combination of the two or all modes of payments in
proper mix
Holdi% Com!ay 7 Mergers and consolidations are distinct business
combinations which differ from a holding company. The relationship of the two
companies when combine their resources are differently known as parent
company which holds the e6uity stock of the other company known as
subsidiary and controls its affairs. The main criteria of becoming holding
company is the control in the composition in the Board of 8irectors in another
company and such control should emerge from holding of e6uity shares and
thereby more than E5H of the total voting power of such company.
77
Ac9uisitio 7 In the context of business combinations, an ac6uisition is the
purchase by one company of a controlling interest in the share capital of
another existing company. An ac6uisition may be affected by'
a3 Agreement with the persons holding ma)or interest in the company
management like members of the board or ma)or shareholders
commanding ma)ority of voting power.
b3 <urchase of shares in open market.
c3 Takeover offer to the general body of shareholders.
d3 <urchase of new shares by private treaty.
e3 Ac6uisition of share capital of one company either by all or any one of
the following forms of considerations vi*. means of cash, issuance of
loan capital, or insurance of share capital.
Ta(eove" 7 A =takeover9 is ac6uisition and both the terms are used
interchangeably. Takeover differs from merger in approach to business
combinations i.e. the process of takeover, transaction involved in takeover,
determination of the share exchange or cash price and the fulfillment of goals of
combination all are different in takeovers than in mergers. &or example, process
of takeover is unilateral and the offeror company decides about the maximum
78
price. Time taken in completion of transaction is less in takeover than in
mergers.
Role of $e"chat *a(e"s i $e"%e"
Merchant bankers are middlemen in settling negotiations for merger between
the offeree and the offeror. Their role is specific and speciali*ed in handling the
merger and takeover assignments. They have to take care and observe some
professional standards assumed in the role to play, briefly listed below.
Merchant bankers assistance is useful for both the companies i.e. the ac6uirer
as well as the amalgamated company. Being a professional expert, merchant
banker is apt to safeguard the interest of the shareholders in both the
companies. This role covers all the four areas in the merger. They are listed
below'
2+3 Obse"vace of !"ofessioal o"ms
Obse"vace of sec"ecy 7 $trict secrecy of the deal is to be maintained till final
settlements are reduced to writing to avoid intervention of other parties as
hostile bidder, to avoid disruptive transactions in the stock market, to obviate
insider trading in the stocks and prevent proxy wars at the shareholders
meeting.
79
Com!liace of le%al fo"malities 7 $tatutes, laws and the procedures laid
down by the statutes should not be bypassed by the offeror or offeree because
violation of law on the part of the seller or target company at times devolves
upon the buyer and the merchant banker could also be held for abetment. Apart
from the above, there are other legal formalities to be complied with in issuing
shares in exchange, safeguard pre@emptive rights of existing shareholders,
checking minutes book, stock books of the target company or its subsidiaries,
locating pending litigation against target company or its subsidiaries.
Com!letio of fiacial a""a%emets 7 ompletion of financial
arrangements shall depend upon the following two aspects'
a3 <repare checklist by making assessment of target company9s
outstanding preference sharesDdebentures or any other instrument to be
settled, to be redeemed or kept outstanding as per terms of agreement
between the parties.
b3 hecklist of the lenders formalities to be complied with so as to conclude
loan transactions for financing the ac6uisition by raising credit from
banks, financial institutions or the private lenders or management.
Closi% of the t"asactio 7 Merchant banks should prepare a schedule and
the checklist of formalities to be completed to conclude the transaction of
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merger or takeover. In this connection, the following points are important which
deserve enlistment'
a3 &or cash transactions, the format of contents of the certificate or letters
to be signed by the ac6uiring company and the target company.
b3 &or sale of assets, the documents like bill of sale, agreements, sale deed
for transferring the freehold immovables like real estate, etc. deed of
assignment of lease in the case of leasehold properties, or deed of
assignment for patent rights, trademarks or copy rights, title to motor
vehicles, etc. be drafted for finali*ation.
c3 $ettlement documents for retrenchment or unemployment compensation.
d3 8ocuments for transfer of deposits from target company9s account to
buyer9s account.
e3 8elivery of comfort letter on completion of transaction which must spell
out that the account procedures have been adhered to, the information
has been as per books of accounts and records maintained by the target
company.
2++3 Ste!s to be ta(e: P"ima"y ivesti%atios about !"o!osed me"%e"
!a"te" com!ay:
81
Pu"chase ivesti%atio befo"e me"%e" 7 It is the fundamental task of the
merchant bankerDconsultant or the financial executives of the company to carry
out following type of analysis before starting negotiations with the proposed
merger partner company or vice versa
13 Industry analysis
#3 Accounting and financial analysis
'3 Management analysis
)3 Marketing analysis
,3 Manufacturing and distribution' +ngineering analysis.
/3 Miscellaneous information analysis.
03 +conomic analysis.
43 !on@balance sheet factory analysis
2+++3 Selectio of methods of me"%e":
$ode of !aymet 7 The following methods are in vogue by which merger or
takeover can be affected. $election should be made of one or more methods on
82
the basis of the information received about the target company and the means
available with the ac6uirer'
a3 Ac6uisition >for cash? of the shares or assets of one company by the
other.
b3 Ac6uisition >in exchange for shares or other securities in the ac6uiring
company? of shares or assets of one company by another.
c3 Ac6uisition of undertaking or shares of both companies by a new
company in exchange for shares or other securities.
d3 Ac6uisition of minority held shares of a subsidiary by parent company.
2+=3 ;ollow the chec( list fo" com!leti% !"elimia"y ivesti%atio fo"
me"%e"
16 Memorandum and articles of association of the company.
#6 Management agreement and documents relating to succession, etc.
'6 $hareholding pattern, agreement between shareholders.
)6 8irectors loan to the company.
,6 Information for preliminary investigation.
a3 Audited accounts for E years and current year.
83
b3 ash flow and ratio analysis for E years with pro)ections for E years.
c3 "ecent valuation report on land, building, plant and machinery,
leases, stocks, etc.
d3 &inancial analysis for last E years covering turnover and profit
margins product@wise, market@wise with pro)ections for E years with
comments of management about continuation of present policy or
addition of alternatives.
e3 Budgeted accounts and management accounts for past E years
covering current year with comments of management.
f3 8epartmental analysis for past E years commenting on staff,
workload, output, suggested changes.
%3 <roduction costs for current year and pro)ection for E years.
h3 "e6uirement of funds for investment in capital assets, working
capital, replacements, expansion, etc. for next E years.
i3 &inancial forecasts for E year, repayments of loans, interest
payments, li6uidity with reference to debtors and creditors.
j3 8epreciation policy.
(3 8ividend policy.
84
l3 +xpected profits and use of profits with reference to dividends,
bonuses, pensions, gratuity or provident funds.
/6 <roduction
a3 8ifferent products and techni6ues of production.
b3 <lant location, deficiency of labour on plant.
c3 Total number of companies in industry and the position of the target
company in the industry J production@wise.
d3 <roduct research or technological obsolescence.
06 $ales
a3 <roduct performance in the market or market share.
b3 Image of the company.
c3 <robability of product substitutes and replacements.
85
$utual ;uds
A mutual fund is a professionally@managed form of collective investments that
pools money from many investors and invests it in stocks, bonds, short@term
money market instruments, andDor other securities. In a mutual fund, the fund
manager, who is also known as the portfolio manager, trades the fundMs
underlying securities, reali*ing capital gains or losses, and collects the dividend
or interest income. The investment proceeds are then passed along to the
individual investors. The value of a share of the mutual fund, known as the net
asset value per share >!AF?, is calculated daily based on the total value of the
fund divided by the number of shares currently issued and outstanding.
Advata%es of mutual fuds 7 Advantages of mutual funds over direct
investment are noted below'
.? Reduce "is( 7 Mutual fund provides small investors access to reduced
investment risk resulting from diversification, economies of scale in
transaction cost and professional finance management.
7? &ive"sified ivestmet 7 $mall investors participate in larger basket of
securities and share the benefits of efficiently managed portfolio by the
experts and are freed of keeping any records of share certificates, etc. of
various companies, tax rules, etc.
86
/? *othe"atio8f"ee ivestmet 7 Investors get freedom from emotional
stress involved in buying or selling securities. Mutual funds relieve them
from such stress as it is managed by professional experts who act
scientifically with right timings in buying and selling for their clients.
G? Revolvi% ty!e of ivestmet 7 Automatic re@investment of dividends
and capital gains provides relief to the members of mutual funds.
E? Selectio ad timi%s of ivestmet 7 expertise in stock selection and
timing is made available to investors so that invested funds generate
higher returns to them.
2? >ide ivestmet o!!o"tuities 7 Availment of wider investment
opportunities that create an increased level of li6uidity for the funds
holders become possible because of package of more li6uid securities in
the portfolio of mutual funds. These securities could be converted into
cash without any loss of time.
$utual fud "etu"s 7 0olders of mutual funds get return in the following
forms'
.? &ivideds 7 The dividend income to mutual fund company from
investments in shares, both e6uity and preference are passed on to
87
holders. These dividends are sub)ect to tax deduction as per Income@tax
laws.
7? Ca!ital %ais 7 Mutual fund holders or owners also get benefits of
capital gains which are reali*ed and distributed to them in cash or kind.
These are sub)ect to tax in the same way as gains or losses of directly
held securities.
/? +c"ease o" dec"ease i et assets value 7 The increase or decrease
in net assets value are the results of unreali*ed gains and losses on
portfolio holdings. They are not taxed until reali*ed.
Sale ad !u"chase of mutual fuds sha"es:
Mutual fund shares may be easily purchased or sold directly through the
management company9s sales officesDagents or through stock brokers. A
loading fee is usually charged >in the case of open fund mutual funds? for the
initial purchase. The fee is added to the !AF of shares in order to arrive at the
purchase price. $uch a loading fee reduces the 6uantity of funds invested. The
fee range may differ as per prevalent practices in different countries and usually
range of GH to 1H of the total purchase. $uch mutual funds are called =load
mutual funds9 where no load fee is charged, are called ,non@load mutual funds-.
!on@load mutual funds will have higher management fee to off set the absence
of the load fee. A small fee is charged on redemption for non@load mutual fund
88
shares when redemption occurs within 2 months of the purchase date. The fee
is ..EH and is meant to discourage trading of the shares on stock exchanges.
lose@end mutual fund shares are sold through underwriters, like e6uity shares
offerings, load mutual fund shares are bought and sold through dealers at their
bid and ask price. The bid price represents the current pro rata market value of
the assets backing each share. The ask price reflects the bid price plus a
commission. The commission which may be as high as :.EH goes to the dealer
or underwriter who sells the shares to cover expenses. %n the other hand, non@
load mutual funds buy and sell their shares at the same price without charging
any additional sum towards fee or load charges.
89
;acto"i%
&actoring , a sort of suppliers9 credit , is understood by the services an
agent renders to its principal by managing the latter9s9 scales ledger ,
reali*ing the book debts or bills receivables against a pre@determined
commission known as =commercial charge9. &or example, the manufacturer
or trader sells the goods directly or through agent and advises the details
of the sale to the factory to reali*e the credits. Thus, the factors
responsibility is contractual with the privity of contract with the seller.
8epending upon the terms of the contract, the factor may assume risk for
non@payment by the customer also. The need for factor services is felt in
view of expanding sales by the manufacturer suppliers so as to manage
the sales reali*ation of books debts. Thus, it reduces dependence upon bank
credit for working capital re6uirements.
The above service of factoring is different what merchant bankers used to
render in the early part of nineteenth century. Then, the mercantile agent had
full control of his principal goods i.e. he used to sell and invoice the goods in his
own name either on term cash or credit depending upon the nature of
transaction.
$echaisms of facto"i%
90
redit sales generate the factoring business in ordinary course of business
dealings. "eali*ation of credit sales is the main function of factoring services.
%nce sale transaction is completed the factor steps in and takes course to
reali*e the sales. Thus, factor works between the seller and the buyer and
sometimes with sellers banks together. The following figure presents a
schematic view of factoring mechanism explaining therein the interaction
between the different parties and flow of information between them'
213 The buye":
a3 Buyer negotiates terms of purchasing plant and machinery or other
material with the seller.
b3 Buyer receives delivery of goods with invoice and instructions by the
seller to make payment to the factor on due dates.
c3 Buyer makes payment to factor in time or gets extension of time or in the
case of default is sub)ect to legal process at the hands of factor.
2#3 The selle":
a3 Memorandum of understanding with the buyer in the form of letter
exchanged between them or agreement entered into between them.
b3 $ells goods to the buyer as per memorandum of understanding.
91
c3 8elivers copies of invoice, delivery challan, memorandum of
understanding, instructions to make payment to factor given to buyer.
d3 $eller receives :5H or more payment in advance from factor on selling
the receivables from the buyer to him.
e3 $eller receives balance payment from factor after deduction of factor9s
service charges, etc.
2'3 The facto":
a3 The factor enters into agreement with seller for rendering factor services
to it.
b3 %n receipt of copies of sale documents as referred to above makes
payment to the seller of the :5H of the price of the debt.
c3 The factor receives payment from the buyer on due dates and remits the
money to seller after usual deductions.
d3 The factor also ensures that the following conditions should be met to
give full effect to the factoring arrangements'
92
i6 The invoice, bills or other documents drawn by seller should contain a
clause that these payments arising out of the transaction as referred to
or mentioned therein might be factored.
ii6 The seller should confirm in writing to factor that all the payments
arising out of these bills are free from any encumberances, charge,
lien, pledge, hypothecation or mortgage or right of set@off or counter@
claim from another etc.
iii6 The seller should execute a deed of assignment in favour of factor to
enable the latter to recover the payment at the time or after default.
iv6 The seller should confirm by a letter of confirmation that all conditions
to sell J buy contract between the buyer and him have been complied
with and the transaction is complete.
v6 The seller should procure a letter of waiver from the bank in favour of
the factor in case the bank has a charge over the assets sold out to
buyer and the sale proceeds are to be deposited in the account of the
bank.
Ty!es of facto"i%:
93
The factor could be of three broad types i.e. >.? domestic factoring, >7? export
factoring, >/? cross border factoring.
213 &omestic facto"i% 7 8omestic factoring could be again sub@divided into
three main principle types vi*.'
2i3 &isclosed facto"i% 7 In disclosed factoring the name of the factor is
disclosed in the invoice by the supplier manufacturer of the goods asking
the buyer to make payment to the factor so named therein.
2ii3 @disclosed facto"i% 7 The name of the factor is not disclosed in the
invoice although factor maintains the sales ledger of the supplier
manufacturer. The entire reali*ation of the business transaction is done in
the name of the supplier company but controls of all moneys remain with
the factor.
2iii3 +voice discouti% 7 The factor could be a bank or the supplier of
funds which discounts the invoices of the supplier at a pre@agreed credit
limit providing finance to the supplier against the security in the form of a
charge on the book debts of the supplier on a specific cash receivables.
2#3 EA!o"t facto"i% 7 In export factoring, banks play an important part. The
export company obtains finance from the bank by virtually selling the export
document to it on a reasonable basis i.e. if the claims are not honoured by the
94
importers bank the exporter shall repay the bank the amount received. The
factor bank usually advances 4EH@@E5H of the export claims of the supplier
exporter.
2'3 C"oss bo"de" facto"i% 7 +xport factoring is also known as cross border
factoring when import factor at the debtor9s place is engaged by export factor.
Import factor has knowledge of local conditions and provides help in reali*ation
as well as reduction of commercial risk. +xport factor takes over the commercial
risk from the exporter on the assurances given by import factor.
$ai te"ms ad coditios of facto"i% 7 The main terms and conditions of
factoring which are included in the agreement to be entered into between the
supplier and factor are precisely listed below'@
16 Assignment of debt in favour of factor.
#6 $elling limits and the conditions with which the factor will have no
recourse to the supplier on non@payment from the customer and in what
circumstances the factor will turn to recourse to the supplier.
'6 $elling out details of the payment to the factor for his services known as
service charge or commercial charge which is usually a percentage on
turnover.
95
)6 $elling out details of the interest to be allowed to the factor on the
accounts where credit has been allowedDto be allowed to the supplier.
The rate of interest is to vary depending upon the money market
conditions and is commonly fixed at 7 and a half to G percent per annum
above the base rate so as to give a better margin to the factor.
,6 Agreement should set the limit of any overdraft by the supplier and the
rate of interest to be charged by the factor on such overdrafts.
/6 The agreement should specify that the amount to be paid by the factor to
the supplier should be net of the service charge.
06 The percentage of the amount of the invoice value to be received from
the factor by the supplier be specified in the agreement. ;sually, about
:5H of the invoice value of the amount is provided by the factor to the
supplier.
46 $pecific schedule be provided in the agreement setting out special terms
for the factor to handle accounts of different customers.
96
*eefits of facto"i%:
16 &actoring makes through discounting the bills, the funds available to
business enterprises which do not carry legal strings like loans or fixed
deposits as the former one is neither a loan nor a deposit.
#6 $ince factoring makes available to the firm short@term money, the firm9s
needs for funds is satisfied without recourse to borrowing. Thus, factoring
helps in avoiding increased debts.
'6 $ince the finds are easily made available by factors to the extent of :5H
of the invoices, the firm can easily meet its liabilities. This enables the
firm to reduce in balance sheet the reali*ations from debtors and also the
elimination of current liabilities to the same extent. Thus, the current
assets are flexibility managed by the firm reducing current ratio as well
as the working capital re6uirements.
)6 &actoring services assist in improving the financial position of the
enterprise and avoidance of sickness for want of reali*ation of sales.
97
CHAPTER 11
PLAFERS +. $ERCHA.T *A.G+.<
16 E.A$
+!AM was founded in.1:G to provide knowledge@driven financial
services at the time when Indian economy investors faced a bewildering
array of options. +!AM is the one of the largest underwriters in India.
+!AM offers promising C exciting companies the opportunity of
assessing the public market e6uity finances. +!AM9s long@term
association with capital markets C primary markets has provided it with
deep insights of the functioning of Indian financial institutions. The
merchant banking services provided by +!AM are' @
Equity debt/syndication: "aising capital through a private
placement of a company9s securities is an effective C timely offering
to a public offering. +!AM represents the clients in the private
placement of debt and e6uity with institutional C high net worth
investors.
Corporate Restructuring: - +!AM provides client with strategic and
practical solutions to financial challenges. Their restructuring services
includes Mergers C Ac6uisitions, Takeovers, 8ebt restructuring,
Buyers services etc.
98
+!AM also provide the seed stage services, value creation services
and I<%9s advisory services which are represented below'
#6 +C+C+ SEC@R+T+ES
III $ecurities Bimited is a leader across the spectrum of Merchant
Banking. (e are experienced in every aspect of the business from
domestic and international capital markets advisory, to MCA advisory,
<rivate +6uity syndication, "estructuring and infrastructure advisory. %ur
investment banking team, based across key cities in India and !ew Nork,
Bondon, and $ingapore consists of professionals with expertise across a
range of industries.
III $+;"ITI+$ provide following services'
Mergers and Acquisitions: - III $ecurities Bimited is amongst the
first Indian investment Banks to form a dedicated MCA practice and
continues to be a leader by providing innovative and uni6ue solutions
to achieve varied ob)ectives of the client. They offer a full range of
advisory services, which include )oint ventures, mergers, ac6uisitions,
and divestitures.
99
Equity Capital Markets: - +C+C+ $ecurities Bimited is at the forefront
of capital markets advisory having been involved in most ma)or book
building and fixed price offerings over the last decade. It is amongst
the leading underwriters of Indian e6uity and e6uity@linked offerings.
Infrastructure Advisory: - III $ecurities Bimited has a dedicated
infrastructure vertical focused on assisting clients in identifying and
capitalising on the opportunities thrown up by the all pervasive boom
in the Indian infrastructure sector.
ealing !ith "ulls and "ears: - III $ecurities Bimited assists
global institutional investors to make the right decisions through
insightful research coverage and a client focused $ales and 8ealing
team. The e6uity group leverages research and distribution reach to
domestic and foreign institutional investors in case of public offerings.
Thus the 6uality of analysis and client servicing standards, are a
testimony to the 6uality of III securities team.
.
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'6 C+T+<RO@P
itigroup orporate and Investment Banking achieve the extraordinary
for our clients around the world. !o financial institution is more
committed to advancing the goals of its clientsOour diverse and talented
staff in more than .55 countries advises companies, governments and
institutions on the best ways to reali*e their strategic ob)ectives. (e
create solutions for and provide the broadest possible capital and market
access to thousands of issuer and investor clients. And no institution
better executes the increasingly complex payment and cash
management solutions re6uired in todayMs global economy. The features
itigroup are as follows' @
%ver the years, itigroup has established a track record of
outstanding business milestones such as ash Management,
pioneered by itigroup in .1:2 and utili*ed by over 155 orporates
with through@puts totaling around P /E billion >:H of IndiaMs 38<?.
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It is IndiaMs largest foreign bank in the &Q >foreign exchange? market
with a .G per cent market share.
As the leading custodian, itibank has over P77 billion of custody
assets under management.
CHAPTER 1#
CHALLE.<ES AHEA&
Merchant bankers have to tap the opportunities lying ahead with the developing
pace of the economy. These opportunities arise in the form of challenges
before the merchant bankers to test their skills, expertise and efforts to attune
their activities with the programme of economic development of the country,
adopt new instruments and innovative means of financing to meet the growing
financial re6uirements of the corporate clients. $ome of the areas of
challenges, which have been explored on the basis of research, are classified
as under'
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Merchant bankers will have to conduct management of capital issues in a
different fashion than what is being done at present to provide the full benefit
of their services of corporate counseling, pro)ect counseling and loan
syndication to small industries then besides distributions of their securities to
the public and arranging long@term institutional or banking finance for them
If the planned ob)ective of economic decentrali*ation and rapid development
of rural economy is to be achieved merchant bankers will have to make
expert efforts in the interest of the national economy by mobili*ing the
savings from the rural sector and creating avenues for its investment in rural
areas in industry, trade and commerce in different shapes and different
magnitudes encouraging the local people to reduce their dependence on
land farming and involve in other activities
Increasing number of sick industries is the ever@growing threat for the
industrial economy of the country. Merchant bankers have to find out ways
and means for rehabilitating the sick industries and also devise the manner
by which the running industry might be saved from going sick
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The millions of small savers are unable to manage their savings in India in
both rural and urban areas. There are mainly the people from the middle
class and lower middle class. Merchant bankers must devise ways and
means to provide services for portfolio management to these citi*ens.

<ublic and private sector institutions engaged in trade, commerce and
industry have many times surplus funds lying with them awaiting opportunity
outside. These funds should be tapped by the merchant bankers from time
to time by mobili*ing them to deficit areas on profitable return basis playing
the interest rate games as is done in $(A< deals in international finance.
In the international field, where the public and private enterprises are
entering to raise foreign currency resources, Indian counterparts have to
depend upon the assistance of foreign merchant bankers. Indian merchant
bankers, therefore, will have to sharpen their skills and attain the re6uisite
expertise in the field of international merchant banking.
To tap the latest technology available internationally and procure the transfer
of the technology to India, merchant bankers should fre6uently make@
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exploring tours to foreign countries, organi*e meetings and conferences with
the hamber of ommerce and Industry and other commercial, industrial
and financial organi*ations so as to enthuse the foreigners to take interest in
investment activity in India.
The challenges noted above are only indicative of the expected role of
merchant bankers and in no way be constructed as exhaustive and final.
These challenges continue to stand before the merchant bankers to meet
the test of time and shall grow in number with the growing re6uirements of
financial services for the corporate sector and the community as a whole.
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CHAPTER 1'
Recommedatios
213 Indian public issues are characteri*ed for their high cost on expenses
like advertisement, stationery, and commission to intermediaries. 8ual
payment to underwriters on same issue one as underwriting commission
and other as brokerage should be curtailed as such type of overlapping
payments enhances cost of the issues. (ith increased competition the
merchant banker should be allowed to negotiate their issue management
fees instead of having fixed fees. 8ue to this the merchant bankers will
have to offer comparable services at lower cost. This also means that
public sector banks may face difficulties if they do not become cost
effective. ost reduction would also be possible by restoring to the
maximum use of non@traditional practices of raising the e6uity and
debenture capital in the market vi*. offer for sale without prospectus,
offer for sale by tender, public issue by tender, private placement of
shares etc.
2#3 There have been a large number of investors who have come in capital
markets through primary markets. These investors are in ma)ority not
exposed to stock market operations. They remain in a state of
uncertainty about the marketability of their stock. The merchant banker in
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future can play an active role in establishing a link between primary
market investors and stock exchanges. This would remove uncertainty
from the minds of investors about marketability of their security holding
and also create a balance in bullish and bearish forces by attracting their
attention to these transactions. $tock exchange introduction would be
made more prominent and be fre6uently permitted as a less costly way
for obtaining 6uotation and making the shares familiar with the investing
public. This may help those companies who have widespread of
shareholders but could not obtain a 6uotation from stock exchanges.
2'3 The traditional process of issue management takes between three to four
months on an average causing in uncertainty and delay in raising funds.
The issue becomes risky as for a new company its success also
depends on success of issue. It increases company9s stake and thus the
cost of issue. Merchant banks can provide a permanent solution to the
problem by buying the entire issue at a discount from the company and
encash it at a premium in the market when the company9s pro)ect goes
into production after gestation period. $BI apital Market Btd. has taken
the first step in this direction. The company will pick up entire e6uity
issue of small companies and later on sell the shares in phases through
private placement and through stock exchanges.
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2)3 The real threat to the merchant bankers functioning in the country is from
the entry of international investment bankers. Managing rural surplus can
be an area in which Indian Merchant Bankers can have an edge over the
foreign counter@ parts. Indian merchant bankers seem to have some
glamorous attraction for !"I9s &unds and they are not giving due
attention to the vast resource of indigenous sources should not go
untapped. In this area merchant banks have to put their efforts in moping
up the rural surplus and channeli*e it into corporate securities. This is an
open field and the Indian merchant bankers can explore it instead of
concentrating on !"I &unds.
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CHAPTER 1)
CO.CL@S+O.
The merchant banker plays a vital role in channeli*ing the financial surplus of
the society into productive investment avenues. 0ence before selecting a
merchant banker, one must decide the services for which he is being
approached. $electing the right intermediary who has the necessary skills to
meet the re6uirements of the client will ensure success.
It can be said that this pro)ect helped me to understand every details about
Merchant Banking and in future how its going to get emerged in the Indian
economy. 0ence, Merchant Banking can be considered as essential financial
body in Indian financial system.
Market development is predicated on a sound, fair and transparent regulatory
framework. To sustain the growth of the market and crystalli*e the growing
awareness and interest into a committed, discerning and growing awareness
and interest into a essential to remove the trading malpractice and structural
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inade6uacies prevailing in the market, and provide the investors an organi*ed,
well regulated market place in future
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