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PRAHLADRAI DALMIA LIONS COLLEGE OF COMMERCE AND ECONOMICS
MERCHANT BANKING IN INDIA
CHAPTER NO 1. INTRODUCTION
The term Merchant Banking has its origin in the trading methods of countries in the late
eighteenth and early nineteenth century when trade taking place was financed by bill of
exchange drawn by merchanting houses. At that time the merchants were merely financing
their own activities. As international trade grew and other lesser-known names wanted to
import goods from abroad, the established merchants ‘lent their names’ to the new arrival by
agreeing to accept bills of exchange on their behalf. The acceptance houses would charge a
commission for this service and thus there grew up the business of accepting bills of finance
trade not simply of themselves, but of others. Acceptance business thus became and to a
degree always has been hallmark of true Merchant Banks.
The second historical of Merchant Banks was the raising of capital for foreign
Government. In many cases, the Merchant Banks have been trading in the countries concerned
and gained the confidence of Governments and other authorities in those countries. Thus, the
second principal element of Merchant Banking became and still is raising of capital through
the issue of stocks and bonds. Therefore, Merchant Banks can be accepting houses or issuing
houses or both. Merchant Banking started in the beginning of 20 th century in UK and USA.
More recently, the services offered by Merchant Banks have entered into the other areas of
operations. Their role is wide ranging and they can now offer most of the financial services
required by a company, touching almost all aspects of establishing and running of industrial
units on sound financial footing.
Dictionary meaning of ‘merchant bank’ refers to an organization that underwrites

corporate securities and advises such clients on issues like corporate mergers, etc. involved
in the ownership of commercial ventures. This organization may be a bank, corporate body,
firm or proprietary apprehension.
STUDY ON MERCHANT BANKING IN INDIA 1

MEANING
Merchant Banking is a combination of Banking and consultancy services. It provides

consultancy, to its clients, for financial, marketing, managerial and legal matters. Consultancy
means to provide advice, guidance and service for a fee. It helps a businessman to start a
business. It helps to raise (collect) finance. It helps to develop and modernize the business. It
helps in restructuring of a business. It helps to revive sick business units. It also helps
companies to register, buy and sell shares at the stock exchange.
DEFINITION OF MERCHANT BANKING
According to Random House Dictionary, “merchant bank is an organization that

underwrites securities for corporations, advises such clients on mergers and is involved in the
ownership of commercial ventures. These organizations are sometimes banks which are not
merchants and sometimes merchants who are not banks and sometimes houses which are
neither merchants nor banks.”

HISTORY OF MERCHANT BANKING
In late 17th and early 18th century Europe, the largest companies of the world were
merchant adventurers. Reinforced by wealthy groups of people and a network of overseas
trading posts, the collected large amounts of money to finance trade across parts of the world.
For example, The East India Trading Company secured a Royal Warrant from England,
providing the firm with official rights to lucrative trading activities in India. This company
was the forerunner in developing the crown jewel of the English Empire. The English colony
was started by what we would today call merchant bankers, because of the firm's involvement
in financing, negotiating, and implementing trade transactions. The colonies of other
European countries were started in the same routine. For example, the Dutch merchant
adventurers were active in what are now Indonesia; the French and Portuguese acted similarly
in their respective colonies.
Till early 1960’s there was no merchant banking in the in the Indian banking system.
It was the Grind lays Bank which started Merchant banking service as far back as 1967. After
Grind lays bank, other foreign banks like Citibank and chartered bank, started these provisions
in India.

EVOLUTION & EMERGENCE OF MERCHANT BANKING
India has arrived the 21st century as one of the Asia’s supreme dynamic economies.
This is the part of the assessment made by International Financial and Capital Market
Institutions based on India’s economic and financial reforms initiated in 1991 and brought to
fruition in various budget.
The progress of any economy mainly be contingent on the efficient financial system of the
country. Indian economy is no exception financial system of the country. The importance of
the financial sector reforms affirms an effective means for solving the problems of economic,
financial and social in India and elsewhere in the developing nations of the world. The
progress of the Securities Industry of any country depends mainly on the flow of funds. In
fact, capital generation is the lifeblood of the capital market without which the health and
soundness of the financial system cannot be geared and for which well-developed capital
market as well as money market is essential.
India’s capital market is among the largest in the developing world. The market is
comprised of 24 stock exchanges transacting long-term debt; debentures and equity shares
both electronic and physical forms. Derivatives financial instruments are also be added to the
market shortly. The number of firms listed on the Indian Stock Exchange is more than the
USA. Market Capitalization of listed firms is 1980s was similar to Brazil, Malaysia,
Singapore and Denmark.
The capital market of the country, however, underwent dramatic variations since the beginning
of 1980s basically because of a progressive realization that the command economy on which the
emphasis was placed could not lead to higher levels of economic development and that a slant towards
a market-oriented economy is necessary.

SCOPE FOR GROWTH OF MERCHANT BANKING IN INDIA
In the present-day capital market scenario, the merchant banks play the role of an
encouraging and supporting force to the entrepreneurs, corporate sectors and the investors.
There is vast scope for merchant bankers to enlarge their operations both in domestic and
international market.
ENTRY OF FOREIGN INVESTORS

An outstanding development in the history of India capital market was its opening up
in 1992 by permitting foreign institutional investors to invest in primary and secondary market
and also permitting Indian companies to directly tap foreign capital through euro issues.
Within two years to March 1994, the total inflow if foreign capital through these routes
grasped to about $5 billion. It is estimated that this figure may go up to $ 35-40 billion by the
turn of this century. Further, foreign direct investments as also investment by NRIs have risen
considerably due to number of incentives offered to them. They need the services of Merchant
Bankers to advise them for their investment in India.
CHANGING POLICY OF FINANCIAL INSTITUTIONS

With the changing emphasis in the lending policies of financial Institutions from
security orientation to project orientation, corporate enterprises would require the expert
services of merchant bankers for project appraisal, financial management etc. The policy of
decentralization and encouragement of small and medium industries will further increase the
demand for technical and financial services which can be provided by merchant bankers.
DEVELOPMENT OF DEBT MARKET
The concept of debt market has set to work through National Stock Exchange and the
Over the Counter Exchange of India. Experts feel that the estimated capital issues of Rs.
40,000 crores in 1994-95, a good portion may be raised through debt instruments. The
development of debt market will offer tremendous opportunity to Merchant Bankers.
INNOVATIONS IN FINANCIAL INSTRUMENTS
The Indian capital market has witnessed innovations in the introduction of financial
instruments such as non-convertible debentures with detachable warrants, cumulative

convertible preference shares, zero coupon bonds, deep discount bonds, triple option bonds,
secured premium notes, floating rate bonds, auction rated debentures etc.
CORPORATE RESTRUCTURING
As a result of liberalization and globalization the competition in the corporate sector
is becoming intense. To survive in the competition, companies are reviewing their strategies,
structure and functioning. This had led to corporate restructuring including mergers,
acquisitions, splits, disinvestments and financial restructuring. This offers good opportunity
to Merchant Bankers to extend the area of their operations.
DISINVESTMENT
The government raised Rs. 2000 crores through disinvestment of equity shares of
selected public sector undertakings in 1993-94. The government proposes to shift the present
method of periodic sale of public sector shares to round the year off loading of shares directly
on the stock exchange from the year 1995-96.

MERCHANT BANKING IN INDIA
In India prior to the enactment of Indian Companies Act, 1956, managing agents acted
as issue houses for securities, evaluated project reports, planned capital structure and to some
extent provided venture capital for new firms. The merchant banking services were started by
foreign banks, namely the National Grind lays Bank in 1967 and the City Bank in 1970.
The Banking Commission in its report in 1972 recommended the setting up of merchant
banking institutions. This marked the beginning of specialized merchant banking in India.
To begin with, merchant banking services were offered along with other traditional
banking services. In the mid-Eighties, the Banking Regulation Act was amended permitting
commercial banks to offer a wide range of financial services through the subsidy rule. The
State Bank of India was the first India Bank to set up merchant Banking division in
1972. Later ICICI set up its Merchant Banking division followed by Bank of India, Bank of
Baroda, Canada Bank, Punjab National Bank and UCO Bank. The merchant banking gained
prominence during 1983-84 due to new issue boom.
Merchant
Banking
Divisions
Financial Private
Foreign Banks Indian Banks Institutions Merchant Bank
Division in Bank
Subsidiary

CHAPTER NO.2: RESEARCH METHODOLOGY
The study is based on secondary data. Data have been collected from the Research
books, Websites for getting the latest data and information related to study.
OBJECTIVES OF THE STUDY:
 To know the role of merchant banking services in our economy.

 To study the duties and responsibilities of merchant bank.
 To understand the problems in merchant banking.
 To analyze the recent development in merchant banking in India.
 To examine the role of merchant banking in promoting capital market in India.
NEED & IMPORTANCE IN INDIA
1. Important reason for the growth of merchant banking is due to exerting surplus demand
on the sources of funds forever expanding industry and trade.
2. Corporate sector had the only alternative to avail of the capital market services for
meeting their long-term financial requirements through capital issues of equity and
debentures.
3. With the growing demand for funds there was pressure on capital market that enthused the
commercial, share brokers and financial consultancy firms to enter into the field of merchant
banking and share the growing capital market.
4. In India have opened their merchant banking windows and are competing in this field, and
also doing advisory functions as merchant bankers as well as managing public issues in
syndication with other merchant bankers.
5. Merchant banks can play highly significant role in mobilizing funds of savers to investible
channels assuring promising return on investments activity.
6. With the growth of merchant banking profession corporate enterprises in both public and
private, sectors would be able to meet the growing requirements for the funds for establishing
new enterprise. Expansion / Modernization /Diversification of the existing enterprises.
7. Merchant banks have been procuring remarkable support from capital market for the
corporate sector for financing their projects.

8. In view of multitude of enactments, rules and regulations, guidelines and offshoot press
release instructions brought out by the Government from time to time imposing statutory
obligations upon the corporate sector to comply with all those requirements prescribed
therein, the need of accomplished agency existed which could provide counseling.
9. Merchant bankers advise the investors of the incentives available in the form of tax reliefs,
other statutory relaxations, good yield on investment and capital appreciation in such
investment to motivate them to invest their savings in securities.
10 Thus, the merchant bankers help industry and trade to raise funds, and the investors to
invest their saved money in sound and healthy concerns with confidence, safety and
organizations for higher yields.

SCOPE OF MERCHANT BANKING IN INDIA
Scope for merchant banking depends upon size of the markets, restriction-liberation, banking
policies, corporate culture, and corporate dynamics.
Size and dynamics of the market: Indian market is growing. In fact India is one if the
largest emerging markets. Obviously, public issues, FDI, debt raising are on rise. Lots of new
and green fried projects are happening. Merchant bankers have lots space to contribute.
Restrictions-liberalization: More liberal the market is, more the things left to be
decided by the corporate. Merchant bankers assist in decision making and hence their scope
increases. With significant market freedom, Merchant Bankers work has increased bankers
work has increased many folds.
Banking –policies: RBI prefers that commercial banks do not indulge in merchant
banking business directly. They should setup a subsidiary for the purpose. This limits scope
of commercial banks and gives space to merchant bankers. This policy also results in fair
business practices. Some countries allow commercial bankers to get involved in IPO’s
placement of debentures, etc. Indian scenario is favorable to merchant bankers work.
Corporate culture: Corporate can-do project appraisal, strategic restructuring in house as

well. If the corporate prefer third-party independent assessment, then will engage merchant
bankers. Otherwise merchant banker’s role is only statutory as in issue management. India
Inc. apparently prefers and is happy with merchant bankers work.
Corporate dynamics: More happening in business gives more opportunities to merchant

bankers. Mergers, takeover acquisition, new Greenfield projects fund raising for government
institutions, active money market are all providing better business prospectus to merchant
bankers.

GROWTH OF MERCHANT BANK IN INDIA
Formal merchant banking activity in India was originated in 1969 with Merchant
Banking Division set up by the Grindlays 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. Other foreign
banks like Citi Bank, Chartered Bank also anticipated the merchant banking activity in India.
State Bank of India started merchant banking in 1973 followed by ICICI in 1974. Both
these Indian merchant bankers emerged as leaders in merchant banking having done
significant business during the period of 1974-1987 in comparison to foreign banks. The
early and mid-seventies witnessed a boom in the growth of merchant banking organizations
in the country with various commercial banks, financial institutions, broker’s firms entering
in to the field of merchant banking.
The early growth of merchant banking in the country is assigned to the Foreign
Exchange Regulation Act, 1973 (FERA) where under large number of foreign companies
operating in India were required to dilute their foreign holdings in order to continue business
in the country. This had caused two-pronged effect viz. firstly, in the form of spate in ‘Foreign
Exchange Regulation Act Issues’ eliciting interest of the investors by creating massive
awareness about capital markets amongst the new class of investing public, secondly,
merchant banking activity became attractive to banks and the firms of consultants and share
brokers who entered into this fields vigorously to reap the advantages of the expenditure
capital markets.
Organizational set up of Merchant Bankers in India
In India a common organizational set up of merchant bankers to operate is in the form

of divisions of Indian and Foreign banks and Financial institutions, subsidiary companies
established by bankers like SBI, Canada Bank, Punjab National Bank, Bank of some firms
are also organized by financial and technical consultants and professionals. Securities and
exchanges Board of India has divided the merchant bankers into four categories based on their
capital adequacy. Each category is authorized to perform certain function. From the point of
Organizational set up India’s merchant banking organizations can be categorized into 4 group
on the basis of their linkage with parent activity. They are

Institutional Base:
Where merchant banks function as an independent wing or as subsidiary of various Private/

Central Governments/ State Governments Financial institutions. Most of the financial
institutions in India are in public sector and therefore such set up plays a role on the lines of
governmental priorities and policies.
Banker-Base:
These merchant bankers’ function as division/ subsidiary of banking organization. The
parent banks are either nationalized commercial banks or the foreign banks operating in India.
These organizations have brought professionalism in merchant banking sector and they help
their parent organization to make a presence in capital market.
Broker Base: -
In the recent past there has been an inflow of Qualified and professionally skilled brokers
in various Stock Exchanges of India. These brokers undertake merchant baking related
operating also like providing investment and portfolio management services.
Private Base:
These merchant banking firms are originated in private sectors. These organizations are
the outcome of opportunities and scope in merchant banking business and they are providing
skill oriented specialized services to their clients. Some foreign merchant bankers are also
entering either independently or through some collaboration with their Indian counterparts.
Private Sectors merchant banking firms have come up either as sole proprietorship,
partnership, private limited or public limited companies. Many of these firms were in
existence for quite some time before they added a new activity in the form of merchant
banking services by opening new division on the lines of commercial banks and All India
Financial Institution (AIFI).

Developments in Merchant Banking Establishment:
 Setting up of Banks Subsidiaries

 Re-organization of Private Firm.
 Establishment of SUA
 Securities and Exchange Board of India (SEBI)
 Discount and Finance House of India (DFHI)
 Credit Rating Information Services of India Ltd. (CRISIL)
 Stock-Holding Corporation of India Ltd. (SHC)
Development -1: Setting up of Banks Subsidiaries:

In order to meet the growing demand for broad-based financial services from the corporate
sector more effectively, the merchant banking divisions of the nationalized Banks have started
forming independent subsidiaries. These subsidiaries offer more specialized services with
professional expertise and skills. SBI Capital Markets Ltd , was incorporated as the first such
subsidiary of SBI on 2nd July, 1986. Then Can bank Financial Services Ltd. was set up as
wholly owned subsidiary of Canada Bank in 1987. PNB Capital Services Ltd. was promoted
by PNB during mid-1988.
Development -2: Re-organization of Private Firms: Expecting tough competition

from growing number of merchant banking subsidiary companies of nationalized banks,
private merchant bankers have also started re-organizing their activities e.g., J.M. Financial
& Investment Consultancy Ltd., 20th Century Finance Corporation Lid., LKP Merchant
Financing Ltd. etc. are some of the private sector firms of merchant bankers who have taken
steps to re-organize their activities.
Development -3: Establishment of SUA

In order to educate and protect the interest of investors, to provide information about new
issues of capital market, to evolve a code of conduct for underwriters and to render legal and
other services to members and public, the Stockbroker Underwriters Association (SUA) was
established in 1984. SUA works in co-ordination with merchant bankers and takes steps for
promoting the activities of capital market.

Development -4: Securities and Exchange Board of India (SEBI):

To develop and regulate securities market, investor protection and to formulate rules and
guidelines for regulation of securities market, the Central Government constituted Securities
and Exchange Board of India on April 4, 1988. The Board carries out all functions as may be
delegated to the Board/Chairman by Central Government for the development and regulation
of securities market. Persons dealing in security market, merchant bankers, underwriters, sub-
brokers, portfolio managers, mutual funds etc. have to seek authorization from the Board.
Development – 5: Discount and Finance House of India (DFHI):

DFHI was incorporated as a company under the Companies Act, 1956 with an authorized and
paid up capital of Rs. 100 crores. Out of this, Rs. 51 crores have been contributed by RBI, Rs.
16 crores by financial institutions and 33 crores by public sector banks. It would also have
lines of credit from public sector banks; refinance facility from the Reserve Bank of India in
order to meet the working capital requirements. DFHI aims at providing liquidity in money
market as it deals mainly in commercial bills.
Development – 6: Credit Rating Information Services of India Ltd.

(CRISIL): CRISIL has been set up in 1987 to provide help to investors, merchant bankers,
underwriters, brokers, banks and financial institutions etc. CRISIL rates various types of
instruments such as debt, equity and fixed return securities offered to the public. It helps the
investors in taking investment decisions.
Development – 7: Stock-Holding Corporation of India Ltd. (SHC):

SHC was set up in 1986 by the All India Financial Institutions to take care of safe custody,
delivery of shares and collection of sale proceeds of the securities. The setting up of SHC is
bound to affect the capital market in future.
Guidelines issued by SEBI towards Merchant Banking
 SEBI has laid down following authorized activities of Merchant bankers:
 Issue management
 Corporate advisor

 Underwriting
 Portfolio management Services
 Managers, consultants or advisors.

The following are the SEBI guidelines for merchant bankers –
1. Authorisation:
Any person or body proposing to engage in the business of merchant banking would need
authorisation by the Securities and Exchange Board of India (SEBI) in their prescribed format.
This will also apply to those presently engaged in merchant banking activity, including as
managers, consultants, or advisers to issues.
2 Authorised activities
(a) Issue of management, which will inter-alia consist of preparation of prospectus & other
information relating to the issues, determining financing structure, tie-up of financiers & final
allotment &/or refund of subscription
(b) Corporate advisory services relating to the issue
(c) Underwriting
(d) Portfolio management services
(e) Managers, consultant or adviser in the issue
3. Authorisation criteria:
All merchant bankers are expected to perform with high standards of integrity & fairness
in all their dealings. A code of conduct for merchant bankers will be prescribed by SEBI.
Within this context, SEBI’s authorisation criteria would take into account mainly the
following-
(a) Professional competence
(b) Personnel, their adequacy & quality, & other infrastructure
(c) Capital adequacy

(d) Past track record, experience, general reputation & fairness in all their transaction
4. Terms of authorisation
All merchant bankers, including the existing ones, must obtained the authorisation from SEBI
within three months from the issue of these guidelines. SEBI may extend this period at its
discretion by a maximum of three more months.
All merchant bankers must have a minimum net worth of RS 1 crore
The authorisation will be for an initial period of 3 years
SEBI may collect from the merchant bankers an initial authorisation fee, an annual fee & a
renewal fee.
All issues must be managed by at least one authorised banker functioning as the sole or lead
manager. Ordinarily not more than two merchant bankers should be associated as lead
managers, advisers or consultants to a public issue.
The specific responsibilities of each lead manager must be submitted to SEBI prior to the
issue.
While directors, promoters & every person who authorises the issue of prospectus shall bear
full responsibility for the contents of the prospectus, merchant banker shall exercise due
diligence independently verifying the contents of prospectus & reasonableness of the views
expressed therein.
To ensure a direct stake of merchant bankers in the issue managed by them, lead managers
would be required to accept a minimum 5% underwriting obligation in the issue, subject to a
ceiling.
Lead managers/merchant bankers would be responsible for ensuring timely refunds and
allotment of securities to the investors.
The involvement of the merchant banker in an issue should continue at least till the completion
of essential follow- up steps, which must include the listing of the instrument, & dispatch of
certificates
The merchant banker shall make available to SEBI such information, documents, returns &
reports as may be prescribed & called for.
SEBI may suspend/cancel the authorisation of merchant bankers for a suitable duration in
case of violations of the guidelines.

REGISTRATION PROCESS OF MERCHANT BANKING

The term ‘Merchant Banking’ originated in the 18th and early 19th centuries in the United
Kingdom when trade between countries was financed by bills of exchange drawn on the
principal merchant houses. With the increase in international trade, the established merchants
started the practice of lending their names to the new comers and accepting the bills of
exchange on their behalf. They would charge a commission for the purpose and thus
acceptance business became the hallmark of Merchant Bankers. Once these banks had gained
the confidence of the government, they also entrusted with the job of issuing bonds in the
London market.
Although Merchant Banking activity ushered in two decades ago, it was only in 1992, in
India, after the formation of SEBI that is defined and a set of rules and regulations governing
it are in place. In fact, the origin of Merchant Banking is to be traced to Italy in late medieval
times and France throughout the seventeenth and eighteenth centuries. Merchant Banker
invested accumulated profits in all kinds of promising activities.
Merchant banker without holding a certificate of registration granted by the Securities and
Exchange Board of India cannot act as a merchant banker.
SEBI will grant certificate to Merchant banker if it follows the following condition: -
 Merchant banker should be a body corporate and should not be non banking finance company
 They must have a necessary infrastructure for maintaining an office
 They must have employed a minimum of 2 persons with experience in merchant banking
business.
 They should not be connected with any company directly or indirectly.

CAPITAL STRUCTURE DECISION
In India, merchant banks operate in the form of Divisions of Indian and Foreign banks
and financial institutions, subsidiary companies established by banks like SBI Capital Markets
Ltd., can Bank Financial Services Ltd., PNB Capital Services Ltd., Indian Bank Merchant
Banking services Ltd., etc., the firm organized by the stock brokers, stock exchange dealers,
the financial and technical consultants and chartered accountants. Securities and Exchange
Board of India (SEBI) has divided merchant bankers into four categories, which are as
follows:
CATEGORIES ACTIVITIES NETWORTH
Categories I To carry on the 1 Crore

activity issue
management &
to act as
adviser,
consultant,
manager,
underwriter,
portfolio
manager.
Categories II Can act only as 50 lakhs

co-manager
Categories III Can act as co- 20lakhs

manager but
cannot
undertake
portfolio
management
Categories IV Can merely act Nil

as consultant to
issue of capital

MERCHANT BANKER’S CODE OF CONDUCT
Merchant Bankers have to abide by the following Code of Conduct as prescribed by the SEBI:
INTEGRITY: Observation of high standards of integrity and fairness in all dealings

with clients and other merchant bankers.
QUALITY SERVICE: Rendering high standard of service, exercising due diligence,

ensuring proper care and exercising independent professional judgment, disclosing to the
clients.
FAIR PRACTICE: Refraining from making any statement or becoming privy to any act,
practice unfair competition, this is likely to be a harmful to the interests of other merchant
bankers, or is likely to place other merchant bankers in a disadvantageous position in relation
to the merchant banker.
RESPONSIBLE STATEMENT: Not to indulge in making any exaggerated statement,

oral or written, to the client, either about the qualification or the capability to render certain
services, or achievements in regard to services rendered to other clients.
BEST ADVICE: Endeavoring to render the best possible advice to the clients keeping
in mind the client’s needs, and the merchant banker’s own professional skill in order to ensure
that all professional dealings are affected in prompt, efficient, and cost-effective manner.
SECRECY: Not to divulge to other clients, press or any other party, any confidential
information about the client and deal in the securities of any client without disclosing to the
Board, as required under the regulations.

QUALITIES REQUIRED FOR GOOD MERCHANT

BANKERS
Merchant bankers play a significant role as catalyst to transform the project ideas into
industrial ventures. They help promotion of the enterprises by undertaking various activities
such as market surveys, choice of suitable location and its size, preparation of documents and
obtaining consent from various authorities. They help in taking important decisions such as
financing mix, management of public issues, credit syndication the success of merchant
banker depends on the qualities which are described below
Knowledge:
Thorough understanding of technical issues related to business, understanding of legal and

statutory requirement, appreciation of business acumen, financial expertise are key things a
merchant banker must know. Delivery of his services depends upon his basic understanding
of these issues.
Liaisoning Ability:
Merchant bankers are required to liaison with SEBI, RBI, the stock exchanges, depositories
and other government authorities for public issue related duties. It is imperative that a
merchant bank maintains excellent rapport with all of them and also close relations even at
informal levels. This only can see speedy and favorable clearance the authorities.
Capital market familiarity:
Merchant banker should be well versed with stock markets, their movements. He should
track important happenings in the market on ongoing basis.
Innovation:
Corporate may approach with unique requirements. Standard solution and products may not
solve problems sometimes. Merchant bankers should do out of box thinking and be able to do
financial engineering. They can device new financial instrument and get approved from the
authorities. Innovation is required even to address stringent legal requirement.

Integrity:
Merchant banker has valuable and confidential information of its customers. Merchant
bankers should take utmost care that the information is not leaked and also not consumed for
the purpose other than for which it was disclose to the merchant banker.
Leadership:
Merchant banker should possess all relevant skills, update knowledge to interact with the
client and effectively communicate. Leadership is synonymous with followers who follow the
one who leads.
Aggressive Acton:
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. Once a
business opportunity has been located, the merchant banker has got to obtain the mandate for
the merchant banking assignment from the clients at once which will depend upon his own
communication skills, persuasiveness and the background of the organization to which he
belongs. A good merchant banker is one who does not allow his client to think anything
outside except what has been advised.
Cooperation & Friendliness:
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 main instruments with
which a merchant banker mixes with the people, gathers information, obtains business
mandate and renders satisfactory services to the clients. Business of an honest business
merchant banker spreads with geometrical propagation when he shares the thoughts of his
clients with sympathetic gestures and offers pragmatic suggestions without greed or favors.
Very often, rude, intemperate and indifferent disposition or blunt outburst withdrew fortunate
business opportunities forever. Affability and cooperation must flow as natural traits in the
merchant banker to win the trust of the clients.
Contacts:
Success of merchant banker depends upon his sociable nature and the richness of wider
contacts. A merchant banker is supposed to be acquainted deeply with all the constituents
of merchant banking. The scope of contact encompasses intimate contiguity and
acquaintances within his own organization, Central and State Government Offices where

compliances under various relevant enactments are to be reported, Indian and foreign banks,
financial institutions at Central and State levels, promoters/directors/owners and chief
executives of the private and public enterprises which would be prospective beneficiaries of
merchant banking services, printers, advertising agencies, brokers and stock exchange
dealers, advocates and solicitors and members of the press whose services are availed of in
executing merchant banking assignments. Merchant bankers should widen contacts and
references and continue to maintain them with goodness, honor and humor by meeting people.
Attitude Towards Problem Solving:
The most important personality trait of a merchant banker is his attitude towards problem
solving. Even client coming to him has got to return fully satisfied having consulted a
merchant banker. Positive approach to understand the view points 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 behavior. Effective communication and
proper feedback are the pre-requisite for creating a positive attitude towards problem solving.
Many persons are effective in this trait without any training for reasons of cultivating a habit
from environment in which they have been brought up at home, in school, college and office.
This is so important that it must be treated as a separate objective quality of a good merchant
banker.
Inquisitives For Acquiring New Skills, Information & knowledge :
Merchant banker’s lice on their 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 possess the quality of inquisitiveness. The
above qualities of a merchant banker are only illustrative illustrative Nevertheless, merchant
banker should possess super business acumen, managerial abilities, administrative capacities
and salesmanship so as to understand the problems and sell the service product to the needy
clients.

RESPONSIBILITIES OF MERCHANT BANKER

To the Investors
Investor protection is fundamental to a healthy growth of the Capital Market. Protection is
not to be conceived as that of compensating for the losses suffered. The responsibility of the
Merchant Banker in ensuring the completeness of the disclosures is of paramount importance
in view of the fact that entire reliance is based on offer Document either Prospectus or Letter
of Offer because an independent agency like a Merchant Banker has done the scrutiny.
Capital structuring
The Merchant Bankers while designing the capital structure take into account the various
factors such as Leverage effect on earnings per share, the project cost and the gestation period,
cash flow ability of the company, the cost of capital, the considerations of management
control, size of the company, and general economic factors. These exercise are done mainly
in order to meet the fund requirement of the company taking due cognizance of the investor’s
preference.
Project Evaluation and due Diligence
Due diligence and project evaluation is another major responsibility of the Merchant Banker.
Where the project has already been appraised by a bank/financial institution, the Merchant
Banker relies on the said appraisal before accepting an assignment. However, where the
project has not been appraised by as bank/financial institution, the Merchant Bank undertakes
a detailed evaluation of the project before taking up an assignment for issue management.
The factors that are looked into in case of the legal aspects are:
 Compliance with the SEBI guidelines and the various guidelines issued by the Ministry of
Finance and Department of Company Affairs.
 Pending litigation’s towards tax liabilities or any criminal/civil prosecution any of the
directors for any offenses.
 Fair and adequate disclosures in the prospectus.
Pricing of the Issue
The Merchant Banker looks into the various factors while pricing the issue. Some of the
factors are past financial performance of the company, Book value per share, stock market

performance of the shares. The Merchant Banker has a vital role to play in pricing of the
instrument.
Marketing of the Issue
Marketing of the issue is a vital responsibility of the Merchant Banker. The first stage is Pre-
issue marketing for placement of the issue with the financial institutions, banks, mutual funds,
FII’s and NRI’s. The second stage is the marketing of the issue to the general public through
various vehicles such as press, brokers, etc.
Bought out Deals
The concept of wholesale but out of public offerings by the Merchant Bankers started off with
over the Counter Exchange of India where a Merchant banker acts also as a sponsor and either
takes up the entire issue to be offered wholly of jointly with other co-investors and off-loads
the same to the public at a later date by an offer for sale. Major amendments were made to
the SEBI regulations regarding Merchant Bankers. The duration of this transaction period
has not officially been announced.

SERVICES RENDERED BY MERCHANT BANKERS
Among the important financial intermediaries are the merchant bankers. The services of
Merchant bankers have been identified in India with just issue management. It is quite
common to come across reference to merchant banking and financial services as though they
are distinct categories. The services provided by merchant banks depend on their inclination
and resources - technical and financial. Merchant bankers (Category 1) are mandated by SEBI
to manage public issues (as lead managers) and open offers in take-overs. These two activities
have major implications for the integrity of the market. They affect investors' interest and,
therefore, transparency has to be ensured. These are also areas where compliance can be
monitored and enforced.
Merchant banks are rendering diverse services and functions, which are as follows:
A. ISSUE MANAGEMENT:
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. When companies seek to raise resources for implementation of
a new project or finance expansion or modernization or diversification of an existing unit or fund long
term working capital requirement, they retain the services of a merchant banker. To a large extent the
type of issue would vary with the purpose for which funds are raised. Merchant bankers when retained
as managers to issue will have to assist the company in all the stages connected with public issue.
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:
Drafting of prospectus and getting it approves from the stock exchanges.

Obtaining consent/acknowledgement from SEBI.
Appointing bankers, underwriters, brokers, advertisers, printers etc.
Obtaining the consent of all the agencies involved in the public issue.
Holding road shows, to sell the issue. These shows are held for the analysts, brokers & institutional
investors. The purpose of these shows is to answer queries from these people about the company and
the project for which the funds are being raised.
Deciding the pattern of advertising.

Deciding the branches where application money should be collected.

Deciding the dates of opening and closing of the issue.
Obtaining the daily report of application money collected at various branches.
Obtaining subscription to the issue.
After the close of the issue, obtaining consent of stock exchange for deciding basis of allotment etc.
B. 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. After all, the premium can play a very role in deciding the company’s capital structure, as larger
the premium lesser will be the requirement for borrowed funds.
The promoter also needs to decide whether to go in for a fresh issue or to go for a rights issue.
However, this will depend mainly on the quantum 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.
The merchant bankers offer following services during the public issues:
 Preparing an action plan and budget for the total expenses for the issue.
 Preparation of application to SEBI and assistance in obtaining the consent from SEBI.
 Drafting of the prospectus.
 Selection of underwriters, Brokers etc.
 Selection of bankers to the issue.
 Selection of advertising agency for publicity.
Obtaining approval of the institutional underwriters and stock exchanges for publication of the
prospectus.
Companies are free to appoint one or more agencies as Managers to an issue. SEBI guidelines insist
that all issues should be managed by at least one authorized merchant banker, functioning either as the
sole or lead manager to the issue. Ordinarily, not more than two merchant bankers should be
associated as lead managers, advisors and consultants to a public issue. In issues of over Rs. 100
crores, the number could be up to a maximum of four.

The responsibilities of merchant bankers in management of public

issues are many.
Some of these are:
We have seen that many unscrupulous promoters have raised money from the market. This has hurt
the investors a lot and has also made investors nervous about stock market investments. This in turn
affects the functioning of stock markets both the primary and the secondary markets. It is therefore
necessary that merchant bankers are satisfied with the viability of the project, which they can then sell
to the investors with confidence. It is therefore important for the reputation of merchant bankers, to
only associate themselves with good issues.
C.UNDERWRITING
Underwriting is like insurance against the failure of an issue. It is a guarantee to the issuing the
company, that the money that it requires for its project will definitely be raised. It means that even if
the issue is not fully subscribed to by the public, the underwriters will make up the short fall.
Underwriting involves the underwriter agreeing to subscribe directly, or to procure subscription for
the unsubscribe portion of the issue, which is not taken up. For the risk that the underwriter takes, he
is paid commission. New companies entering the markets for the first time, always face number of
problems in raising funds from the market. One of the biggest problems of course that the company is
not well known to the investors and many of them will be unwilling to invest their money in such
ventures. Many a times even existing companies may find it difficult to raise money, due to some
reasons. Issuing companies therefore approach different underwriters with a request to underwrite the
issue.
D.MERGERS AND ACQUISITIONS
Mergers and acquisitions (M&A) and corporate restructuring are a big part of the corporate
finance world. Every day, Wall Street investment bankers arrange M&A transactions, which
bring separate companies together to form larger ones. When they're not creating big
companies from smaller ones, corporate finance deals do the reverse and break up companies
through spin-offs, carve-outs or tracking stocks.
Role of Merchant Banker
Mergers & Acquisitions is an area where Merchant Bankers act as intermediaries in

negotiating on one with corporate interested in hiving of divisions/companies which are not

with in the purview of the long-term business strategy of the group/company, and on the other
hand for Corporate interested in non organic growth by acquiring companies/units for reason
strategic or non strategic in nature. Mergers can be beneficial for both the entities, as due to
competition the companies unable to survive or prosper on their own may like to merge and
face competition and achieve growth targets. Takeovers may be hostile or friendly in nature,
hostile takeovers are without the consent of the company and company being takeover may
work out an anti takeover strategy to counter the threat. Merchant Bankers provide following
services
Identification of potential takeover targets.

Financial & Technical appraisal of the merger/takeover proposal.
Negotiation with the parties for arriving at the suitable price or exchange ratio.
Assistance in obtaining necessary approval & addressing procedural & legal issues.
E. PROJECT COUNSELLING
Project counseling is very important and lucrative merchant banking services which only very few
merchant bankers having advantages of knowledge, skills and experience over others are able to render
satisfactorily. The corporate seek advice in respect of identification of profitable investment
opportunities in the related business areas (like forward/backward integration) or as part of
diversification process. The merchant bankers carry out detailed studies on product demand patterns,
cost structures, etc., to enable the corporate in preparation of feasibility study may involve
arrangement of a foreign collaboration, advice on technical parameters and also legal issues.
Scope of services
Project services are needed by industrial entrepreneurs in India in the following areas: -
Preparation of project report

Deciding upon the financing pattern to finance the cost of the project.
Aspects of project appraisal with financial institutions/banks.
Project report
Project report consists of technical process, location, management profile, means of financing, reports
on market surveys and market explorations. Merchant bankers advise the clients on project
preparation. Merchant bankers, on behalf of their clients, engage technical consultants specialized in
the specific area, and marketing experts to prepare technical feasibility report and market survey
reports. Merchant bankers maintain the list of such experts approves by financial institutions and
assign the work to these experts.

Project report purpose

Project report about the proposed activity is prepared to obtain government approvals particularly in
the following areas:
Grant of industrial license to undertake specified industrial activity.

Foreign investment and technology tie-up.
Grant import license for importing raw material, plant, machinery and equipments.
Grant of foreign exchange allocation for import of capital goods or raw materials, etc.
Grant of subsidies and other concessions from the government at center or state levels or from
government sponsored agencies, etc.
F. LOAN SYNDICATION
It refers to assistance rendered by merchant banks to get mainly term loans for projects. Such loans
may be obtained from a single development finance institution or a syndicate or consortium as in the
case of large term loans. Merchant banks can also help corporate clients to raise syndicated loans from
commercial banks.
Scope of service
Once the client company has decided about the project proposed to be undertaken, the next step is
looking for the sources wherefrom funds could be procured to implement the project. The
responsibility of locating the sources of finance, approaching these sources by positioning in requisite
prescribed applications and complying with all the formalities involved in the sanction and disbursal
of loan rests with the merchant bankers who provide the service of loan/credit syndication.
Loan 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 working
for and on behalf of their clients.
All India financial institutions
Industrial Finance Corporation of India (IFCI)

Industrial Development Bank of India (IDBI)
Us trial Credit & Investment Corporation of India Ltd (ICICI)
State level financial bodies
State Financial Corporations (SFCs)
State Industrial Development Corporations (SIDCs)

State Industrial & Investment Corporations (SIICs)

All India level investment institutions
Life Insurance Corporation of India (LIC)
Unit Trust of India (UTI)
General Insurance Corporation of India (GIC) & its subsidiary companies.
Commercial banks: Commercial banks join in consortium loan being provided by the above
institutions.
Mutual Funds & Venture Capital Funds: these funds generally invest in equity but mutual
funds contribute to the issues of Debentures/Bonds on private placement basis as well as
subscribe to public issues.
G. RESTRUCTURING SERVICES
Merchant bankers assist the management of the client company to successfully restructure
various activities, which include mergers and acquisitions, divestitures, organization buyouts,
joint venture among others. To help companies achieve the objectives of these restructuring
strategies, the merchant banker participates in different activities at various stages which
include understanding the objectives behind the strategy (objectives could be either to obtain
financial, marketing, or production benefits), and help in searching for the right partner in the
strategic decision and financial valuation of the proposal.
H. CAPITAL ASSISTANCE
In providing financial assistance, merchant banks offer a full understanding of all facets of
the capital markets. This includes all types of debt and equity financing available from both
the domestic and international markets.
It should be understood that interest rates are not the only definition of capital costs. Restraints
on availability, prepayment terms, and operating effectiveness can often outweigh what might
appear to be inexpensive capital with low interest rates. Too often, capital includes costs,
which force an entrepreneur or a business to undertake undesirable actions. In the short-run,
some actions might be necessary, but often in the long run are detrimental. He also knows
how to substitute one type of capital for another, sometimes utilizing internal sources from
asset repositioning or cash creation from enhancements in working capital. He understands

fully the menace versus return elements necessary to complete the capital procurement
process.
I.CORPORATE ADVISORY SERVICES
Merchant bankers offer customised solutions to solve the financial problems of their clients.
Advice is sought in areas of financial structuring (as shown in the Modern Manufacturing
case above). Merchant bankers study the working capital practices that exist within the
company and suggest alternative policies. They also advise the company on rehabilitation and
turnaround strategies, which would help companies to recover from their current position.
J. FACTORING SERVICE
Factoring involves the outright sale of account receivable. By such sale a client (the exporter or
manufacturer) transfers his/her ownership of the accounts to a factor (an organization, firm). The
factor buys all the client’s outstanding invoices and takes over all the subsequent dealings with the
buyer/importer/customer. It is short-term debt financing. Here three parties are involved
The factoring organization /firms

The manufacturer/exporter/seller
The importer/customer/buyer
Role of Merchant Banker In Factoring
The merchant banker may act as factor organization with a view to earning a great amount of
commission. The factor provides the following services:
Financing
Advisory services if necessary
Collection of bills/Account Receivable against sales proceeds.
Maintenance of sales ledger
Provide further if necessary
Covering losses if there are any
K. ASSET SECURITIZATION

It is a process through which some inactive assets (mortgage assets) are converted into
cash/active assets. It is long-term debt financing. Here assets are converted into long-term
bonds. The whole process is done by the Special Purpose Vehicle (SPV). In this approach,
the merchant banker for issuance of security bonds against the assets with a matching of time
and terms between mortgage property and security bonds. Here the selection of asset is
generally considered on the basis of the following:
 Quality of assets
 Certainty of repayment
 Good ranking from the credit rating agency.
The process of asset securitization takes place in the following firms:
 Originating Institutions/Firm
 Special Purpose Vehicle (SPV)
 Merchant Banker (MB)
L. FOREX SERVICES
This aspect of banking is becoming increasingly important as the forex flow in the country
is increasing and the international markets are funding the operations of the corporate in India.
The success of any business is measured by the fund management; this makes treasury
management as a very critical finance function. Management of treasury profit center requires
a wide variety of knowledge in the area of global money markets and financial instruments
such as deposit certificates, treasury bills, forecasting, source evaluation and cost of domestic
and foreign currency funds. Treasury and risk management ensures cost effectiveness in
planning strategies in this era of deregulation.
Role of merchant banker in Forex function
The currency values, interest rates, share index and commodities affect the financial
derivatives like futures, swaps and other tools of risk management. Corporate therefore
employ well-trained professionals to manage treasury and forex functions so that they can
ensure competent management. Thus, this service is provided to Corporate through merchant
bankers. Merchant bankers assess various markets to advice Corporate or other banks that

needs currency. Merchant bankers constantly update about the policies of the regulatory
bodies, monitors the current prices, makes predictions based on the analysis of trends etc.
M. HIRE PURCHASE SERVICE
It involves a system under which term loans for purchases of goods and services are advanced
to be liquidated in stages through a contractual obligation. The goods whose purchases are
thus financed may be consumer goods or producer goods or they may be simply services such
as air travel. Hire purchase credit may be provided by the seller himself or by any financial
institution. However, unlike in other countries, the emphasis in India is on the provision of
instalment credit for productive goods and services rather than for purely consumer goods.
Merchant Banker undertakes the activity of financing for hire-purchase activities. The
merchant banker looks more to the credit-worthiness and business morality of the buyer than
the value of security
N. LEASE FINANCE COMPANIES
Lease finance companies provide finance to acquire the use of assets for a stipulated period
of time without owning them. The user of the asset is known as the lessee, and the owner of
the asset is known as the Lessor. Leasing is medium-term arrangement for finance.
Role of Merchant Banker

Merchant Bankers helps in assessing the credit risk of industrial borrowers. The merchant
bankers provide help in evaluating lease proposals. He analyse the merits and demerits of
lease finance with reference to a given proposal and leave it to their clients to decide on the
appropriate source and type of finance, thus enlarging their range of choices and the variety
of services available to them.
O. VENTURE CAPITAL
Venture capital is money provided by professionals who invest alongside management in
young, rapidly growing companies that have the prospective to develop into significant
economic contributors. Venture capital is an important source of equity for start-up
companies. Professionally managed venture capital firms generally are private partnerships
or closely-held corporations funded by private and public pension funds, endowment funds,

foundations, corporations, wealthy individuals, foreign investors, and the venture capitalists
themselves.
FUNCTIONS OF MERCHANT BANKING
The important function of merchant banking in India
Merchant banks advise small companies about business opportunities, government policies,
incentives and concessions available. It also helps them to take advantage of these
opportunities, concessions the functions of merchant banking are listed as follows-
Raising Finance for Clients:
Merchant Banking helps its clients to raise finance through issue of shares, debentures, bank
loans, etc. It helps its clients to raise finance from the domestic and international market. This
finance is used for starting a new business or project or for modernization or expansion of the
business.
Broker in Stock Exchange:
Merchant bankers act as brokers in the stock exchange. They buy and sell shares on behalf
of their clients. They conduct research on equity shares. They also advise their clients about
which shares to buy, when to buy, how much to buy and when to sell. Large brokers, Mutual
Funds, Venture capital companies and Investment Banks offer merchant banking services.
Project Management :
Merchant bankers help their clients in the many ways. For e.g. Advising about location of a
project, preparing a project report, conducting feasibility studies, making a plan for financing
the project, finding out sources of finance, advising about concessions and incentives from
the government
Advice on Expansion and Modernization:
 Merchant bankers give advice for expansion and modernization of the business units.
They give expert advice on mergers and amalgamations, acquisition and takeovers,

diversification of business, foreign collaborations and joint-ventures, technology

upgradation, etc.
 Managing Public Issue of Companies Merchant bank advice and manage the public
issue of companies. They provide following services:
 Advise on the timing of the public issue.
 Advise on the size and price of the issue.
 Acting as manager to the issue, and helping in accepting applications and allotment of
securities.
 Help in appointing underwriters and brokers to the issue.
 Listing of shares on the stock exchange, etc
 Handling Government Consent for Industrial Projects.
A businessman has to get government permission for starting of the project. Similarly, a
company requires permission for expansion or modernization activities. For this, many
formalities have to be completed. Merchant banks do all this work for their clients.
Special Assistances to Small Companies and Entrepreneurs:
Merchant banks advise small companies about business opportunities, government policies,
incentives and concessions available. It also helps them to take advantage of these
opportunities, concessions, etc.
Services to Public Sector Units:
Merchant banks offer many services to public sector units and public utilities. They help in
raising long-term capital, marketing of securities, foreign collaborations and arranging long-
term finance from term lending institutions.
Revival of Sick Industrial Units:
Merchant banks help to revive (cure) sick industrial units. It negotiates with different
agencies like banks, term lending institutions, and BIFR (Board for Industrial and Financial
Reconstruction). It also strategies and executes the full renewal package.
Portfolio Management :

A merchant bank manages the portfolios (investments) of its clients. This makes investments
safe, liquid and profitable for the client. It offers expert guidance to its clients for taking
investment decisions.
Corporate Restructuring:
It includes mergers or acquisitions of existing business units, sale of existing unit or

disinvestment. This requires proper negotiations, preparation of documents and completion
of legal formalities. Merchant bankers offer all these services to their clients.
Money Market Operation :
 Merchant bankers deal with and underwrite short-term money market instruments,
such as:
 Government Bonds.
 Certificate of deposit issued by banks and financial institutions.
 Commercial paper issued by large corporate firms.
 Treasury bills issued by the Government (Here in India by RBI).
Leasing Services:
Merchant bankers also help in leasing services. Lease is an agreement between the lessor and
lessee, whereby the lessor allows the use of his specific asset such as equipment by the lessee
for a certain period. The lessor charges a fee called rentals.
Management of Interest and Dividend:
Merchant bankers help their clients in the management of interest on debentures / loans, and
dividend on shares. They also advise their client about the timing (interim / yearly) and rate
of dividend

PROBLEMS OF MERCHANT BANKERS
1. SEBI guidelines have authorized merchant bankers to undertake issue related activities only
with an exception of portfolio management. These guidelines have made the merchant
bankers either to restrict their activities or think of separating these activities from the present
one and float new subsidiary and enlarge the scope of its activities.
2. SEBI guidelines stipulate a minimum net worth of Rs.1 crore for authorization of merchant
bankers. Small but professional and specialized merchant bankers who do not have a net worth
of Rs.1 crore may have to close down their business. The entry is denied to young, specialized
professionals into merchant banking business.
3. Non co-operation of the issuing companies in timely allotment of securities and refund of
application money is another problem of merchant bankers. The guidelines have put the
responsibility on the merchant bankers. They have to seek the co-operation of the issuing
company to shoulder the responsibility.

COMPARISON BETWEEN MERCHANT BANK &

COMMERCIAL BANKS
MERCHANT BANKS COMMERCIAL BANKS
Assist in raising capital in Provide funds in the form of

the form of equity, term loan & working capital.
preference shares,
syndicated loan and
working capital
instruments.
Advisors not financers Financing is the main

business
Do not accept the Demand deposit is a key

chequable deposits feature
Mainly fees-based Mainly Fund Based

business Business
Most of the works they Commercial banks majority

get about management of business is of term lending &
equity issues in the bank deposits.
capacity of lead
managers, underwriters,
pricing of issues, book
running, Liaisoning
ability.
Being Advisors, they are Being lenders, they are more

closer to the customers cautious, evaluate risks in
and get to know risks of lending proposal and cannot
the transactions properly. afford to be grossly

They work on risk shields relationship based and close

i.e. mitigation measures. to the customers.
MERCHANT BANKING: INDIAN SCENARIO
Merchant Banking activity was formally initiated into the Indian capital markets when Grind
lays Bank received the license from Reserve Bank in 1967. Grind lays which started with
management of capital issues, recognized the needs of emerging class of entrepreneurs for
diverse financial services ranging from production planning and system design to market
research. Apart from meeting specially, the needs of small-scale units it provided
management constancy services to large and medium sized companies. Following Grind lays
Bank, Citi Bank set-up its Merchant Banking division in 1970. The division took up the task
of assisting new entrepreneur and prevailing units in the evaluation of new projects and raising
funds through borrowing and issue of equity. Management professional services were also
offered. Consequent to the recommendations of Banking Commission in1972, that Indian
bank should start Merchant Banking Division in 1972. In the initial years the SBI’s objective
was to extract corporate advice and assistance to small and medium entrepreneurs.
The economic reforms initiated by the Government since July 1991 in the files of industry,
trade and financial sector have paved the way for prompt development of the economy.
Several projects have been conceived since then and practically all the major groups in the
country that have announced their intentions to set-up mega projects in infrastructure sector
envisaging investment of thousands of crores. With several large projects been set-up and
many more on the drawing board, the demand for a complete range of Merchant Banking
services encompassing project advisory services, issue management and financial advisory
services for corporate sector has increased considerably. This has led to a sharp growth in the
Merchant Banking business in the last 2 years.

PLAYERS IN MERCHANT BANKING
1. ENAM
ENAM was founded in1984 to provide knowledge-driven financial services at the time when
Indian economy investors faced a bewildering array of options. ENAM is the one of the
largest underwriters in India. ENAM offers promising & exciting companies the opportunity
of assessing the public market equity finances. ENAM’s long-term association with capital
markets & primary markets has provided it with deep insights of the functioning of Indian
financial institutions.
The merchant banking services provided by ENAM are: -
Equity debt/syndication: Raising capital through a private placement of a company’s

securities is an effective & appropriate offering to a public offering. ENAM represents the
clients in the private placement of debt and equity with institutional & high net worth
investors.
Corporate Restructuring: ENAM provides client with strategic and practical

clarifications to financial challenges. Their restructuring services includes Mergers &
Acquisitions, Takeovers, Debt restructuring, Buyers services etc.
ENAM also provide the seed period services, value creation services and IPO’s advisory
services which are represented below:

2. ICICI BANK
ICICI Securities Limited is a leader across the spectrum of Merchant Banking. We are
experienced in every aspect of the business from domestic and international capital markets
advisory, to M&A advisory, Private Equity syndication, Restructuring and infrastructure
advisory. Our investment banking team, based across key cities in India and New York,
London, and Singapore consists of professionals with expertise across a range of industries.
ICICI SECURITIES provide following services:
Mergers and Acquisitions: - ICICI Securities Limited is amongst the first Indian
investment Banks to form a dedicated M&A practice and continues to be a leader by providing
innovative and distinctive solutions to achieve varied objectives of the client. They offer a
full range of advisory services, which include joint ventures, mergers, acquisitions, and
divestitures.
Equity Capital Markets: - ICICI Securities Limited is at the forefront of capital markets
advisory having been involved in most major book building and fixed price offerings over the
last decade. It is amongst the foremost underwriters of Indian equity and equity-linked
offerings.
Infrastructure Advisory: - ICICI Securities Limited has a dedicated infrastructure
vertical focused on assisting clients in identifying and capitalizing on the opportunities thrown
up by the all-pervasive flourishing in the Indian infrastructure sector.
Dealing with Bulls and Bears: - ICICI Securities Limited assists global institutional
investors to make the right decisions through insightful research coverage and a client focused
Sales and Dealing team. The equity group leverages research and distribution reach to
domestic and foreign institutional investors in case of public offerings.

3. KOTAK SECURITIES LIMITED
Kotak Securities Limited, a subsidiary of Kotak Mahindra Bank, is the stock broking and
distribution arm of the Kotak Mahindra Group. The company was set up in 1994. Kotak
Securities is a corporate member of both The Bombay Stock Exchange and The National
Stock Exchange of India Limited. Its operations include stock broking and distribution of
various financial products - including private and secondary placement of debt and equity and
mutual funds. Currently, Kotak Securities is one of the largest broking houses in India with
wide geographical reach.
The company has four main areas of business:
Kotak Institutional Equities: - Kotak Institutional Equities, among the top institutional
brokers in India. It mainly covers secondary market broking and the marketing of equity
offerings, including IPOs, to domestic and foreign institutional investors.
Structured Finance (Project Finance & Advisory Business): -KMCC has
developed expertise in various vertical segments in the infrastructure sector including power,
oil, gas, ports, automobiles, steel & metals and hotels, by offering structured finance solutions.
Some of the transactions executed by this team include:
Advisor to Ford on financial closure for its Car project in India.
Advisor to one of the largest LNG projects on the Western coast of India.
Financial advisors and loan syndications to British Gas and GAIL.
Mergers & Acquisitions: -In the area of Mergers & Acquisitions, we provide our clients
expertise and a comprehensive set of services that help them achieve their strategic and
financial objectives. Our spectrum of services include:
Divestments
Spin-Offs / Restructuring & Joint Ventures / Strategic Alliances

4. CITIGROUP
Citigroup Corporate and Investment Banking achieve the extraordinary for our clients
around the world. No financial institution is more committed to advancing the goals of its
clients our diverse and talented staff in more than 100 countries advises companies,
governments and institutions on the best ways to realize their strategic objectives. We 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 required in today's global economy. The features
Citigroup are as follows: -
Over the years, Citigroup has established a track record of outstanding business
milestones such as Cash Management, pioneered by Citigroup in 1986 and utilized by over
900 Corporate with through-puts totaling around $ 35 billion (8% of India's GDP).
It is India's largest foreign bank in the FX (foreign exchange) market with a 14 per cent
market share.
As the leading custodian, Citibank has over $22 billion of custody assets under
management any deal is valuation. And when the market booms, agreed valuations for
proposed M&A are thrown into disarray.

5. DSP MERRILL LYNCH LTD
DSP Merrill Lynch Limited (DSPML), among India's leading investment banking and brokerage
company, is a culmination of a long standing relationship between DSP Financial Consultants Ltd.,
and Merrill Lynch & Co., the leading international capital raising, financial management and advisory
company. DSPML is a full-service investment bank and broking company with leadership position in
M&A, Capital
Raising, Securities Research, Equity & Debt Brokering, and Investment Advisory services. Euro
money Magazine has ranked DSPML as the "Best Domestic Securities firm in India" for the last four
consecutive years. This Transaction heralds DSPML as a key player in the private equity market. The
service features of DSPML are as follows: -
DSPML has consistently been rated as one of India's leaders in origination, distribution, and
trading of equity and debt securities.
DSPML has consistently brought reputable issues to the capital markets.
A diverse client base made up of India's most prestigious private and public sector
corporations and multinational corporations have rendered DSPML a commanding presence
in the Indian capital market.
Through direct market's group, DSPML offers investors access to every major initial or
subsequent public offering.
DSP Merrill Lynch is the leading underwriter of Indian equity and equity-linked offerings
across domestic and international markets. By leveraging their extensive knowledge of local
markets and global resources, they have delivered innovative and customized solutions to
their clients.

6.UPFC (Uttar Pradesh Financial Corporation)
Scheme for merchant banking & financial services. Decades ago UPFC has taken a humble
step for the industrial development of U.P. by providing term loan assistance to small &
medium scale units. Since then it has acquired a matured professional approach in Industrial
Financing, several small-scale units nurtured by UPFC has groomed into big enterprises. In
order to meet the challenges of liberalized policy of the Government & Changed economic
Scenario, UPFC has started Merchant Banking & other financial Services to serve its valued
clients. UPFC, a category-I Merchant Banker with unmatched expertise in project appraisal
and term lending offers a whole gamut of Merchant Banking Services.
Issue management: UPFC provides expert services to manage public issues of the companies
successfully; it has already managed Public Issues as a lead Manager with great success .
Underwriting: In order to provide a protective umbrella to the public issues of its clients,
UPFC also underwrites the issue.
Subscription to equity share: UPFC subscribes to the equity shares reserved under FI
quota, to enable the company to market the public issue effectively.
Advisory services: UPFC, with its long experience, advises its clients for various advisory
services such as capital Structuring, loan syndication etc.
Project certification: UPFC also certifies the projects going to capital markets for raising
funds. This is a specialized activity of the Corporation.
Other financial services: As a part of its commitment to provide professionalized

financial services to its clients, UPFC also offers Bill Discounting, Equipment Leasing & Hire
Purchase Services, Short- term loan, Brand Equity loan, etc to meet diversified requirements
of it's clients

7. JM Morgan Stanley
Investment Banking focuses on capital raising, mergers, acquisitions,

restructuring and financial advisory and private equity for Indian corporates in the
international and domestic capital markets. Through innovation and value-added services, the
firm has contributed immensely to the overall development of the capital market and mergers
and acquisitions in India. It has the merchant banking and underwriting licenses from the
Indian securities market regulator, the Securities and Exchange Board of India. Some of the
recent transactions of JM Morgan Stanley
US$ 20MM fund raising for Nipuna Services (a BPO subsidiary of Satyam Computer
Services)
Rs. 3,219 MM preferential allotment of equity shares/ warrants in Bajaj Auto Finance Limited
to financial investors and the promoter, Bajaj Auto Limited.
The services of JM Morgan Stanley are:
JM Morgan Stanley has a dedicated group that regularly interacts with over 40 financial
investors in India as well as overseas.
JM Morgan Stanley offers research-based investment advisory and equity broking services to
corporates, high net-worth individuals and retail investors across a wide range of financial
products.
They are known for lead managing some of the most complex and innovative and large equity
and debt offerings in India and abroad by the Indian issuers. A robust deal-flow across sectors
has allowed them to build significant traction with the financial investors. This helps in raising
private equity capital for the companies.

CHAPTER NO.3: LITRATURE REVIEW

SHARMA (2005) In his research paper studied the marketing effectiveness in merchant.
banking services in India. According to the researcher, the liberalization process India has led
to major developments in the industrial sector to make India a truly formidable and globally
competitive industrial power and consequently, the merchant banks have emerged as an
important intermediary in the financial market The study aimed to analyze the relevance of
marketing mix in the merchant banking services and to make a comparative analysis of its
effectiveness of public as well as the private sector merchant banks. The researcher found that
the ‘people’ was the most important component of marketing mix followed by product, price,
promotion, and place respectively. The results also showed that private sector merchant
banking had more effective and efficient marketing mix as compared to public sector
merchant banks. Unbalanced service mix with the dominance of issue management,
Inadequate quality of services, inadequate distribution network and inadequate promotional
measures were found to be the major deficiencies which hindered the marketing performance
of merchant banks in India.
GUPTA (2002) In his paper examined the performance of merchant banks in India on the
basis of their different positions (lead manager, co-manager, and adviser) and different
categories of different ownership (public, private and foreign). The researcher selected 104
working merchant bankers out of 164 registered with SEBI and covered the period from 1997-
98 to 2001-02. The researcher concluded that the private sector merchant banker performed
well as compared to public sector and foreign merchant banks both as regards to public issues
managed and the amount of funds raised. Although, public sector and foreign banks
performed identically as regards total number of public issues managed but the performance
of foreign merchant bankers was better than that of the public sector banks in terms of funds
raised. The author pointed out that merchant banking was mainly restricted to the activity of
issue management and other activities such as underwriting, loan syndication, investment
counseling and portfolio management were still not much emphasized. The researcher’s
recommendations included the need for providing quality services functional cum expert
oriented organization and a team of specialist

Aggarwal (1995)5 traced the origin, growth and history of merchant banking in India and
abroad. The objectives of the study included the analysis of organizational structure,
management pattern and performance evaluation of SEBI registered category I merchant
bankers during the period 1989- 90 to 1993-94. The study found that merchant banking
institutions lack skill development programmer for training the staff, up to date information
and more concentration of decision making power. Despite this, the study highlighted the
important role of merchant bankers in the growth of capital market and mobilization of
resources from public through issue management activities. The author recommended for
stopping the turnover of personnel in merchant banking divisions of nationalized banks due
to transfers, who have up to date market information and adopt professional attitude for
providing services as merchant bankers.

CHAPTER NO.4:
DATA ANALYSIS, INTERPRETATION AND

PRESENTATION.
To know the role of Merchant Banking services in our economy .
The role of merchant bank in India is as Promoter, Advisor, Rehabitator, Managerial

economist, corporate advisor Financial export. These banks act as a sort of intermediary
between capital issuers and the buyers of the securities. The Necessity of Merchant Banking
Services, the economy of the country is often afflicted with different unpredictable conditions
like inflation, unemployment, stagnation and so forth. The need to sustain a steady growth is
necessary for corporations and individuals which is possible only with a long-term strategy
and financial options. The merchant banking services provide solutions and financial options.
These banks provide advisor services to clients based on a particulars fee. They also provide
other financial services to mergers and clients. It is the only financial institute that invests its
capital in the client’s company. It acts as an intermediary between those who possess capital
and those who need capital. To help their clients with a number of financial options, the
merchant banking services operate in a number of countries all over the world. In this manner
the clients have the opportunity to survey the different financial options to ensure better
growth.
To study the duties and responsibilities of Merchant bank .
A merchant banker in the conduct of his business has to observe high standards of integrity
and fairness in all his dealings with his clients and other merchant bankers. Merchant bank
has to render at all times high standards of service, exercise due diligence, ensure proper care
and exercise independent professional judgement.
Merchant bank cannot make any statement or become privy to any act, practice unfair
competition, which is likely to be harmful to the interest of other merchant bankers. Merchant
banks should not make any exaggerated statement, whether oral or written, to the client either
about his qualification or his capability to render certain services or his achievements in regard
to services rendered to others clients.

To understand the problems faced by Indian merchant bankers.
The problem with merchant banking is not allowing youthful professionals into merchant
banking business. Even though merchant banking is vast it needs more acceptable expertise
to provide more services. Some problems faced by Indian merchant bankers.
Industry compartmentalization: Company which is in merchant banking business would

have expertise in underwriting, hire purchase, leasing, and portfolio management, money-
lending. But RBI does not permit merchant banking firms to get into these activities. So, the
same promoters have to setup different companies for different purposes.
Malafide practices: India corporate culture is bettering, but still many corporates have
excessively friendly approach. Allotment of shares, tampering with project appraisal report
to bankers is common. Corporate like to use merchant bankers for malafide intentions.
Regulations: Though regulations are much better now, there is still scope for further
improvement. Merchant bankers can be made more accountable and professional
qualification focused merchant banking is not available. Industry is not well organized and
all the players do not play the same tune. This is specifically evident in comparison with
insurance industry and mutual funds industry.
To analyse the recent development in merchant banking in India.
India has contributed to the merchant banking system. They acquiring more foreign
investors, disinvesting from the government, and introducing new financial instruments to
assist in work. The foreign investors both in the form of portfolio investment and through
foreign direct investments are venturing in Indian economy. It is increasing the scope of
merchant bankers in many ways. Disinvestment in the government sector in the country gives
a big scope to the merchant banks to function as consultants. New financial instruments are
introduced in the market time and again. This basically provides more and more opportunity
to the merchant banks. The Mergers and corporate restructuring along with Memorandum of
understanding and Memorandum of association are giving immense opportunity to the
merchant bankers for consultancy jobs.

To examine the role of merchant banking in promoting capital market in

India.
Merchant bank is a financial institution primarily engaged in offering financial services and
advice to corporations and to wealthy individuals. The term can also be used to describe the
private equity activities of banking. Merchant bank invests its own capital in a client company.

CHAPTER NO,5: CONCLUSION
Merchant banker plays a vital role in canalizing the financial surplus of the society into
productive investment avenues. Hence before selecting a merchant banker, one must decide
what the services for which he is being approached are. Selecting the right intermediary who
has the necessary skills to meet the requirements of the client will ensure success.
It can be said that this project helped me to understand every detail about Merchant banking
and in future how it’s going to get emerged in the Indian economy. Hence, Merchant Banking
can be considered as essential financial body in Indian financial system.
Market development is predicted on a sound, fair and transparent regulatory framework. To

sustain the growth of the market and crystallize the growing awareness and interest into a
committed, discerning and growing awareness and interest into essential to remove the trading
malpractice and structural inadequacies prevailing in the market, and provide the investors an
organized, well regulated market place in future.
Merchant bankers act as a critical link between the corporate that are intended to raise funds
and the investors who are interested to invest in securities industry. Beside issue management,
the Merchant Bankers are also undertake the activities like underwriting connected with the
public issue management, Managing/advising on International offerings of Debt/Equity
Bonds And other instruments, Private placement securities, Primary or Satellite dealership of
government securities, Corporate Advisory Services related to securities market(e.g.,
Takeovers, Acquisitions, Disengagement), Stock-Broking, Advisory Services for projects,
Syndication of rupee term loans and International Advisory Services.

BIBLIOGRAPHY AND WEBLIOGRAPHY
BOOKS REFFERED
Merchant Banker – H.R. SUNEJA
Merchant Banking & Financial Services – Himalaya Publishing House
Websites
www.scribd.com/doc/28076595/Merchant-Banking
http://www.investopedia.com
http://www.wallstreetmojo.com
www.businessmanagemnetideas.com
http://corporatefinanceinstitute.com
http://indianmoney.com

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PRAHLADRAI DALMIA LIONS COLLEGE OF COMMERCE AND ECONOMICS

MERCHANT BANKING IN INDIA

Dictionary meaning of ‘merchant bank’ refers to an organization that underwrites

STUDY ON MERCHANT BANKING IN INDIA 1

Merchant Banking is a combination of Banking and consultancy services. It provides

DEFINITION OF MERCHANT BANKING

According to Random House Dictionary, “merchant bank is an organization that

STUDY ON MERCHANT BANKING IN INDIA 2

HISTORY OF MERCHANT BANKING

STUDY ON MERCHANT BANKING IN INDIA 3

EVOLUTION & EMERGENCE OF MERCHANT BANKING

STUDY ON MERCHANT BANKING IN INDIA 4

SCOPE FOR GROWTH OF MERCHANT BANKING IN INDIA

ENTRY OF FOREIGN INVESTORS

CHANGING POLICY OF FINANCIAL INSTITUTIONS

DEVELOPMENT OF DEBT MARKET

INNOVATIONS IN FINANCIAL INSTRUMENTS

STUDY ON MERCHANT BANKING IN INDIA 5

STUDY ON MERCHANT BANKING IN INDIA 6

MERCHANT BANKING IN INDIA

STUDY ON MERCHANT BANKING IN INDIA 7

CHAPTER NO.2: RESEARCH METHODOLOGY

OBJECTIVES OF THE STUDY:

 To know the role of merchant banking services in our economy.

NEED & IMPORTANCE IN INDIA

STUDY ON MERCHANT BANKING IN INDIA 8

STUDY ON MERCHANT BANKING IN INDIA 9

SCOPE OF MERCHANT BANKING IN INDIA

Corporate culture: Corporate can-do project appraisal, strategic restructuring in house as

Corporate dynamics: More happening in business gives more opportunities to merchant

STUDY ON MERCHANT BANKING IN INDIA 10

GROWTH OF MERCHANT BANK IN INDIA

Organizational set up of Merchant Bankers in India

In India a common organizational set up of merchant bankers to operate is in the form

STUDY ON MERCHANT BANKING IN INDIA 11

Where merchant banks function as an independent wing or as subsidiary of various Private/

STUDY ON MERCHANT BANKING IN INDIA 12

Developments in Merchant Banking Establishment:

 Setting up of Banks Subsidiaries

Development -1: Setting up of Banks Subsidiaries:

Development -2: Re-organization of Private Firms: Expecting tough competition

Development -3: Establishment of SUA

STUDY ON MERCHANT BANKING IN INDIA 13

Development -4: Securities and Exchange Board of India (SEBI):

Development – 5: Discount and Finance House of India (DFHI):

Development – 6: Credit Rating Information Services of India Ltd.

Development – 7: Stock-Holding Corporation of India Ltd. (SHC):

Guidelines issued by SEBI towards Merchant Banking

 SEBI has laid down following authorized activities of Merchant bankers:

STUDY ON MERCHANT BANKING IN INDIA 14

 Portfolio management Services

 Managers, consultants or advisors.

(b) Corporate advisory services relating to the issue

(d) Portfolio management services

(e) Managers, consultant or adviser in the issue

(a) Professional competence

(b) Personnel, their adequacy & quality, & other infrastructure

(c) Capital adequacy

STUDY ON MERCHANT BANKING IN INDIA 15

All merchant bankers must have a minimum net worth of RS 1 crore

The authorisation will be for an initial period of 3 years

STUDY ON MERCHANT BANKING IN INDIA 16

REGISTRATION PROCESS OF MERCHANT BANKING