Merchant banking

CHAPTER 1. EVOLUTION & EMERGENCE OF MERCHANT BANKING:

Introduction :
India has entered the 21st century as one of the Asias most dynamic economies. This is the part of the assessment made by International Financial and Capital Market Institutions based on Indias economic and financial reforms initiated in 1991 and brought to fruition in various budget. In fact, the achievement is the cumulative effect of yester years coupled with economic reforms in the Indian economy. The economic and financial liberalization, based on the firm pillars of fiscal discipline, structural reform and Securities Market reforms has yielded strong dividends to the economy.

The progress of any economy mainly depends 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.

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The Indian financial system, as it has evolved, is comparable in many respects with the financial system of the most advanced developing countries as well as some of the developed countries. It has a well-diversified structure of financial institutions and instrument and, in fact financial development has out-placed economic development. Indias 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 Capitalisation of listed firms is 1980s was similar to Brazil, Malaysia, Singapore and Denmark.

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CHAPTER 2. MERCHANT BANK HISTORY :

In late 17th and early 18th century Europe, the largest companies of the world were merchant adventurers. Supported by wealthy groups of people and a network of overseas trading posts, they 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 manner. For example, the Dutch merchant adventurers were active in what is now Indonesia; the French and Portuguese acted similarly in their respective colonies. The American colonies also represent the product of merchant banking, as evidenced by the activities of the famous Hudson Bay Company. One does not typically look at these countries' economic development as having been fueled by merchant bank adventurers. However, the colonies and their progress stem from the business of merchant banks, according to today's accepted sense of the word. Merchant Banking, as the term has evolved in Europe from the 18th century to today, pertained to an individual or a banking house whose primary

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function was to facilitate the business process between a product and the financial requirements for its development. Merchant banking services span from the earliest negotiations from a transaction to its actual consummation between buyer and seller. In particular, the merchant banker acted as a capital sources whose primary activity was directed towards a commodity trader/cargo owner who was involved in the buying, selling, and shipping of goods. The role of the merchant banker, who had the expertise to understand a particular transaction, was to arrange the necessary capital and ensure that the transaction would ultimately produce "collectable" profits. Often, the merchant banker also became involved in the actual negotiations between a buyer and seller in a transaction.

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CHAPTER 3: MERCHANT BANK: Growth and Indian scenario:

 GROWTH OF MERCHANT BANKING 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 assumed 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, brokers firms entering in to the field of merchant banking.

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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 expanding capital markets.

MERCHANT BANKING: INDIAN SCENARIO:

The economic reforms initiated by the Government since July 1991 in the files of industry, trade and financial sector have paved the way for rapid development of the economy. Several projects have been conceived since then and almost 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 year.

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INDIAS TOP 10 MERCHANT BANKERS:

PLAYERS

Rank 05

Rank 04 4

Mkt

Mkt

Value

Deals

share05 share04 ($m) 17.3 13.1 2,534 13

Kotak/Goldman Sachs Morgan Stanley Merrill Lynch & Co. Standard Chartered Ernst & Young Citigroup Ambit Corporate Fin DBS Group ICICI Securities UBS

2 3

2 3

15.2 12.1

14.7 14

2 ,227 1,771

11 12

6.7

4.8

981

5 6 7

1 6 8

6.7 6.6 6.4

16.9 11 4.9

980 962 936

37 8 21

8 9 10-

5 -

4.8 4.4 3.8

12.2 -

704 649 550

1 10 3

Rankings based on deals in up to 30th September, 2005 .

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CHAPTER 4: MERCHANT BANKING OBJECTIVES :

1) Merchant Banker play a vital role in the economic and financial development of the country. As a result of economic and financial liberalization new companies are formed and number of issues floated to raise resources from the investor community.

2) Considering the significance of the issue the Government of India instituted SEBI in 1990 to regulate and control various market intermediaries.

3) SEBI issued various rules and regulations for each and every segment of the capital market.

4) To regulate Merchant bankers, with the twin objective viz., investor protection and development of the capital market, SEBI issued rules and regulations for Merchant Bankers.Subsequent 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 (Registered under these regulations with SEBI) as Lead Manager.

5) In this context Merchant Banker gained the importance in the Indian Securities Industry. In the wake of economic reforms and financial

liberalization the need for financial resources has significantly increased. As an intermediary-Merchant Banker plays a crucial role in exploring the ways and Page 8

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means for the funds. Besides, issue management, Merchant Banker also performs several other important functions like underwriting of securities, Private placement of securities, corporate advisory services e.g., Takeovers, Acquisitions, Disinvestments Managing & International offerings of

debt/equity, i.e. GDR, ADR, Primary dealership of government securities.

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CHAPTER 5: QUALITIES OF GOOD MERCHANT BANKERS:

Merchant bankers are individual experts who organize and manage the merchant banks. The operations of merchant banks are, therefore, influenced by the personality trait of these individuals. For the success of merchant banks operations, the qualities which merchant bankers should have are discussed below:-

 LEADERSHIP

merchant banker should possess all relevant skills,

update knowledge to interact with the clients and effectively communicate. Leadership is synonymous with followers who follow the one who leads.  AGGRESSIVE ACTION- 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 Page 10

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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. Therefore, promptness in grasping the4 clients problems and providing better choice amongst alternative solutions evidence aggressive approach in the profession to hold the clients interest in entirely for the present as well as for the future.  COOPERATION AND FRIENDLINESS- no 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 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 favours. Very often, rude, intemperate and indifferent disposition or blunt out burst withdrw fortunate business opportunities forever. These are the vices unbecoming of a merchant banker and should be eschewed. Friendliness and cooperation must flow as natural traits in the merchant banker to win over the trust of the clients like a doctor or lawyer who retain their clients permanently.

 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

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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, honour and humour by meeting people in person, through writing and in special gatherings.

 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 which could be gained partly through learning process and partly as an in born quality. 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 trait

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is a subject matter of personality development but is so important that it must be treated as a separate objective quality of a good merchant banker.

 INQUISITINESS

FOR

ACQUIRING

NEW

SKILLS,

INFORMATION AND KNOLEDGE merchant bankers 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. All good qualities in merchant bankers are difficult to be defined so elaborately. 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.

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CHAPTER 6: Functions of a merchant banker:

The following comprise the main functions of a merchant banker:
y

Management of debt and equity offerings- This forms the main function of the merchant banker. He assists the companies in raising funds from the market. The main areas of work in this regard include: instrument designing, pricing the issue, registration of the offer document, underwriting support, and marketing of the issue, allotment and refund, listing on stock exchanges.

Placement and distribution- The merchant banker helps in distributing various securities like equity shares, debt instruments, mutual fund products, fixed deposits, insurance products, commercial paper to name a few. The distribution network of the merchant banker can be classified as institutional and retail in nature. The institutional network consists of mutual funds, foreign institutional investors, private equity funds, pension funds, financial institutions etc.

Corporate advisory services- Merchant bankers offer customised solutions to their clients financial problems. The following are the main areas in which their advice is sought: Financial structuring includes determining the right debt-equity ratio and gearing ratio for the client; the appropriate capital structure theory is also framed. Merchant bankers also explore the refinancing alternatives of the

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client, and evaluate cheaper sources of funds. Another area of advice is rehabilitation and turnaround management. In case of sick units, merchant bankers may design a revival package in coordination with banks and financial institutions. Risk management is another area where advice from a merchant banker is sought. He advises the client on different hedging strategies and suggests the appropriate strategy.
y

Project advisory services- Merchant bankers help their clients in various stages of the project undertaken by the clients. They assist them in conceptualising the project idea in the initial stage. Once the idea is formed, they conduct feasibility studies to examine the viability of the proposed project. They also assist the client in preparing different documents like the detailed project report.

Loan syndication- Merchant bankers arrange to tie up loans for their clients. This takes place in a series of steps. Firstly they analyse the pattern of the clients cash flows, based on which the terms of borrowings can be defined. Then the merchant banker prepares a detailed loan memorandum, which is circulated to various banks and financial institutions and they are invited to participate in the syndicate. The banks then negotiate the terms of lending on the basis of which the final allocation is done.

Providing venture capital and mezzanine financing- Merchant bankers help companies in obtaining venture capital financing for financing their new and innovative strategies.

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CHAPTER 7:

Services of Merchant Banks

The financial institutions in India could not meet the demand for long term fund required by the ever expanding industry and trade. The corporate sector enterprises, therefore meet their requirement through issues of shares and debenture in the capital market. To raise money from the capital market, promoters bank upon merchant banker to manage the whole show by rendering multifarious services. The merchant banker also advises the investors of the incentives available in the form of tax reliefs and other statutory obligations. The services of merchant bankers are described in detail in the following sectors: 1. Corporate counseling: Corporate counseling covers the entire field of merchant banking activities viz. project counseling, capital restructuring, project management, public issue management, loan syndication, working capital, fixed deposit, Page 16

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lease financing, acceptance credit, etc. The scope of corporate counseling is limited to giving suggestion and opinions to the clients and helps taking action to solve their problems. It is provided to a corporate unit with a view to ensure better performance; maintain study growth and created better image among investors. 2. Project Counselling: Project Counselling includes preparation of project reports, deciding upon the financing pattern to finance the cost of the project and appraising the project report with the financial institution or banks. Project reports are prepared to obtain Government approval, to get financial assistance from institution and plan for the public issue. The financing mix is to be decided keeping in view the rules, regulation and norms prescribed by the Government or followed by financial institution. The projects are appraised, as to the location, technical, commercial and financial viability of the project. Project counselling also include filling up of application form with relevant information for obtaining funds from financial institution. 3. Issue Management: Management of issue involves marketing of corporate securities viz. equity shares, preference share and debenture or bonds by offering them to public. Merchant banks act as intermediary whose main job is to transfer from those who own it to those who need it The issue function may be broadly divided into pre-issue management and post-issue management. In both the stages, legal requirement have to be

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complied with and several activities connected with the issue have to be coordinate. The pre issue is divided into Issue through prospects, offer for sale and private placement Marketing and underwriting Pricing of issues 4. Post issue management: The post issue management consists of collection of application form and statement of amount received from banker and screening application, deciding allotment procedure, mailing of allotment letters, share certificate and refund orders. Registrars to the issue play a major role in post issue management. They receive the application, verify them and submit the basis of allotment to the stock exchange and they must approve it. Registrars have to ensure that the applications are processed and allotment or refund orders and send with in 70 days of the close of the issue. The time limit of 70 days has proved difficult to adhere and applicants have to wait for any time between 90 to 180 days. Merchant bankers assist the company by co-coordinating the above activities. 5. Underwriting of public issue: Underwriting is the guarantee given by the underwriter that in the event of under subscription by amount under written would be subscribed by him. It is insurance to the company, which propose to make public offer Page 18

Merchant banking
against risk of under subscription. The issues packed by well-known

underwrittrers generally receive a high premium form the public. These enable the issuing company to sell securities quickly. All public issues have to fully underwritten. Only Category I, II and III merchant bankers are permitted to underwrite an issue subject to the limit that the outstanding commitments of any such individual merchant banker at any point of time do not exceed five times of his net worth (paid-up capital and free reserves excluding revaluation reserves). This criterion is applicable to brokers also. Lead managers have to be underwriting mandatorily 5% of the issue or Rs.2.5 lakh whichever is less. Banks/Merchant banking subsidiaries cannot underwrite more than 15% of any issue. By ensuring a direct stake in the underwriting, the merchant bankers make raising of external resources easy. 6. Managers, Consultants or Advisers to the Issue: The managers to the issue assist in the drafting of prospectus, application forms and completion of formalities under the Companies Act, appointment of Registrar for dealing with share applications and transfer and listing of shares of the company on the stock exchange. Companies are free to appoint one or more agencies as managers to issue. SEBI guidelines insist that all issues should be managed by at least one authorised merchant bankers. Ordinarily, not more than two merchant bankers should be associated as lead managers, advisers and consultants to a public issue. In issues of over Rs.100 crores, up to a maximum of four merchant bankers could be associated as managers.

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7. Portfolio Management: Portfolio refers to investment in different kinds of securities such as shares, debentures or bonds issued by different companies and securities issued by the government. It is not merely a collection of unrelated assets but a carefully blended asset combination within a unapplied framework. Portfolio Management refers to maintaining proper combination of securities in a manner that they give maximum return with minimum risk. Merchant Bankers provide portfolio management service to their clients. Today the investor is very prudent. Every investor is interested in safety, liquidity and profitability of his investment. But investors cannot study and choose the appropriate securities. They need expert guidance. Merchant Bankers have a role to play in this regard. They have to conduct regular market and economic surveys to know. i) Monetary and fiscal policies of the government. ii) Financial statements of various corporate sectors in which the investments have to be made by the investors. iii) Secondary market position i.e., how the share market is moving. iv) Changing pattern of the industry. v) The competition faced by the industry with similar type of industries. The merchant bankers have to analyse the surveys and help the prospective investors in choosing the shares. The portfolio managers generally will have to classify the investors based on capacity and risk they can take and

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arrange appropriate investment. Thus portfolio management plans successful investment strategies for investors. The portfolio management service is very important need of the day since 1/8 of our investment at present comes from rural areas. Even though there are 23 stock exchanges in our country, 28 nationalised banks with network of about 50,000 branches, only 1/8 of the savings is mobilised from the rural areas. By establishing portfolio management centres at various areas more investments can be augmented from villages. Instead of concentrating on large investors, there is immediate need to develop small investors, which could be done through portfolio management. The role, which can be played by non-resident Indians in the economic development of a country, is not small. With their technical skill and foreign exchange and also with their knowledge of foreign market they can contribute much for the country. In order to utilise this opportunity government is offering number of facilities and incentives. But the NRI investment is not showing any signs of substantial improvement for corporate sector. This is due to the NRI A/cs being scattered with various branches of banks throughout the country and no institutions is taking action to pool these resources. The non-resident themselves for investment will have to follow many rules and regulations which are complicated. In this regard merchant bankers should help the NRI in selecting right type of securities and offering expertise guidance in fulfilling government regulations. By this service to NRI account holders merchant bankers can mobilise more resources for the corporate sector. 8. Advisory Services Relating to Mergers and Takeovers: A merger is

a combination of two or more companies into a single company where one Page 21

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survives and others lose their corporate existence. A takeover is the purchase by one company acquiring controlling interest in the share capital of another existing company. Merchant bankers are the middlemen in setting negotiation between the offeree and offeror. Being a professional expert they are apt to safeguard the interest of the shareholders in both the companies. Once the merger partner is proposed, the merchant banker appraises merger/takeover proposal with respect to financial viability and technical feasibility. He gets approval from the government/RBI, drafts scheme of amalgamation and obtains approval from financial institutions. 9. Off-Shore Finance: The merchant bankers help their clients in the following areas involving foreign currency. (i) Long term foreign currency loans (ii) Joint ventures abroad (iii) Financing exports and imports and The bankers render other financial services such as appraisal, negotiations and compliance with procedural and legal aspects. 10. Non-Resident Investment: The services of merchant bankers include investment advisory services to NRI in terms of identification of investment opportunities, selection of Operational details like purchase and sale of securities, securing necessary clearance from RBI for repatriation of interest and dividend.

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CHAPTER 8: ROLE OF MERCHANT BANKERS:

The role of merchant banker is dynamic in view of diverse nature of merchant banking services. Merchant bankers dynamism lies in promptly attending to the corporate problems and suggesting ways and means to solve them. The nature of merchant banking services is development oriented and promotional to help the industry and trade to grow and survive. Merchant banker is therefore, dedicated to achieve this objective through his dynamism. He is always awake to renew his skills, develop expertise in new areas so as to equip himself with the knowledge and techniques to deal with emerging new problems of corporate business world. He has to keep pace with the changing with environment where government rules, regulations and policies affecting business conditions frequently change; where science and technology create new innovations in production processed of industries envisaging immediate renovations, diversifications modernizations or replacements or exiting plant and machinery or other equipments putting new demands for finances and necessitating overhauling of the capital structure of the firms. Merchant bankers have to think and devise new instruments of financing industrial projects. He has to assume wider responsibilities of saving industrial backwards areas to eliminate regional imbalances in industrial development of the country. He has to guide the wider section of the community possessi8ng surplus money to invest in corporate securities and other productive investment channels. He has to help the industry in Page 23

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different form to ensure that it runs risk free and devoid of uncertainly by assisting the promoters worth his knowledge and skills to resolve the problems being faced by them. He has to watch the interest and win over the confidence of the government, its agencies along with the entrepreneurs, the investors and the whole community. He must bridge the communication gap between sections and resolve the problem being faced in different areas concerned with the business world. To discharge the above role, a merchant banker has to be dynamic. For this reason, a merchant banker is sometimes called moving bottom, i.e. one who never sits at one place, always moving attending meeting and meeting clients and constituents doing business and getting business by attending meetings and conferences, imparting knowledge to others and acquiring new knowledge to maintain his supremacy in possession of latest information. His role depicts a personality cult, which is unique and envious to be followed by others. In the days ahead, Merchant Banker have very significant role to play tuning their activities to the growth pattern of corporate sector, the industry and the economy as an whole which is, in it a challenging task and to meet these challenges. Merchant Bankers will have to be more vigorous and strategic in playing their role. They will have also to adopt new ways and means in discharging their role.

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CHAPTER 9: Guidelines for Merchant Bankers:

Merchant Banking has been statutorily brought within the framework of the Securities and Exchange Board of India under SEBI (Merchant Bankers) Regulations, 1992. 1) In terms of the guidelines issued during April 1990, all Merchant Bankers will require authorization by SEBI to carry out business. The criteria for authorization include: i) Professional qualification in finance, law or business management; ii) Infrastructure like adequate office space, equipment and manpower; iii) Employment of two persons who have the experience to conduct business of merchant bankers; iv) Capital adequacy; v) Past track of record, experience, general reputation and fairness in all transactions. 2) SEBI issued further guidelines classifying the merchant bankers into four categories based on the nature and range of activities and their responsibilities to SEBI investors and issuers of securities. SEBI has issued revised guidelines on December 22, 1992 classifying the activities of merchant bankers as follows: Page 25

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The first category consists of merchant bankers who carry on any activity of issue management which will inter alia consists of preparation of prospectus and other information relating to the issue, determining financial structure, tie-ups of financiers and final allotment and refund of subscription and to act in the capacity of managers, advisor or consultant to an issue, portfolio manager and underwriter. The second category consists of those authorised to act in the capacity of co-manager/advisor, consultant, and underwriter to an issue or portfolio manager. The third category consists of those authorised 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. Minimum net worth for first category is Rs.1 crores, second category Rs.50 lakhs, third category Rs.20 lakhs and fourth category is nil. 3) An initial authorization fee, an annual fee and renewal fee may be collected by SEBI. 4) All issues must be managed at least at one authorised banker, functioning as the sole manager or the lead manager. Ordinarily not more than two merchant bankers should be associated as lead managers. But, for issues over Rs.100 crores and above, the number of lead managers may go up to a maximum of four. The specific responsibilities of each lead manager must be submitted to SEBI prior to the issue.

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5) The lead merchant banker holding a certificate under category I shall accept a minimum-underwriting obligation of 5% of the total underwriting commitment or Rs.25 lakhs whichever is less. 6) Each merchant banker is required to furnish to the SEBI half yearly unaudited financial results when required by it with a view to monitor the capital adequacy of the merchant banker. 7) SEBI has prescribed a code of conduct to the merchant bankers. The banker must perform his duties with highest standards of integrity and fairness in all his dealings. He will render at all times high standards of service, exercise due diligence, ensure proper care and exercise independent professional judgement. The merchant banker and his personnel will act in an ethical manner in all his dealings with the investors, clients and fellow bankers. All merchant bankers must adhere to the code of conduct. 8) The above guidelines will be administered by SEBI and it will supervise the activities of merchant bankers. 9) SEBI has been vested with power to suspend or cancel the authorization in case of violation of the guidelines. 10) To ensure transparency and accountability in the operation of merchant bankers and to protect the investors, a number of obligations and responsibilities have been imposed on them. It has been decided to ask merchant bankers to enter into agreement with corporate body setting out their mutual rights, liabilities and obligations relating to an issue particularly on disclosure, allotment and refund, maintenance of books of accounts and submission of half- yearly reports to SEBI. Page 27

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11) Inspections will be conducted by SEBI to ensure that provisions of the regulations are properly complied with and to investigate the complaints from customers. It is obligatory on the part of merchant bankers to furnish of all details sought by the investigating team. The regulations, however, indicate that the Board would give reasonable notice to merchant bankers before undertaking inspection. On the basis of inspection report, the Board will communicate the contents of the report to the concerned merchant banker to give him/her an opportunity to put forth his/her submissions. On receipt of the explanations, if any, of the merchant bankers, the SEBI would advise merchant bankers to take any measures that it may deem fit, and to comply with the provisions of the regulations. The notification procedure relating to action to be initiated against merchant banks in case of default has been detailed out. The regulations empower SEBI to take action against defaulting banker such as

suspension/cancellation of registration. In case of deliberate manipulation, or price rigging or concerning activities or deterioration in the financial position, the board is empowered to cancel the registration of the merchant banker. Under the regulation, the SEBI is empowered to suspend a registration of a merchant banker in case the merchant banker furnishes wrong or false information, fails to resolve the complaints of the investors, etc. The penalty or suspension or cancellation of registration can be imposed by SEBI only after holding an enquiry and giving sufficient opportunity to the merchant banker of being heard. Any merchant banker aggrieved by an order of SEBI, can, however, appeal to the Union Government. In September 1997, SEBI brought about some major changes in SEBI (Merchant Bankers) Rules and Regulations, 1992. Accordingly only Corporate Page 28

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bodies will be allowed to function as merchant bankers. Moreover, the multiple categories of merchant banker shall be abolished and there will be just one entity viz., Merchant Banker. The merchant bankers presently functioning as Merchant Bankers Category II, III and IV shall have an option to either upgrade themselves as Merchant Bankers (presently Merchant Banker Category I) or seek separate registration as underwriters or Portfolio Managers under the respective regulations. The merchant bankers will be prohibited from carrying out fund based activity other than those related exclusively to the capital markets. In effect, the activities undertaken by NBFCs such as accepting deposits, leasing and bill discounting would not be allowed to be undertaken by a merchant banker.

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CHAPTER 10: MERCHANT BANKING IN THE SHELTER OF SEBIS AMBIT:

The SEBI Act, 1992 provides for registration & regulation of intermediaries in the securities market with the object of protecting the interest of investors & merchant banking have been bought under the purview of the said Act; the rules & regulation for Merchant Bankers under the SEBI Act, 1992 have been notified in the Official Gazette on December 22, 1992 in exercise of the powers under section 30 of the Act.

The Regulations pertaining to Merchant Banking are spread over into five chapters. Chapter I deal with short title & commencement & definition of various terms. Chapter II discusses the regulations relating to merchant banker while the general obligations and responsibilities of merchant bankers are covered in chapter III. The procedures for inspection are laid down in Chapter IV, followed by the last chapter on SEBIs regulation for initiating action against defaulting merchant banker.

AMBI: - (Association of Merchant Bankers in India)

Association of Merchant Bankers in India is a professional non-profit company setup to represent the industry. It is expected to set the code of ethics and facilitate dialogue between the industry and regulatory bodies. Training and awareness programs are also expected from AMBI. Because of lack of support from the members and non-initiative from SEBI/ government, AMBI is dormant (practically defunct) at present. Page 30

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CHAPTER 11:
MERCHANT BANKING ORGANISATIONS AND CLASSIFICATION:
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., BOI Finance 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 Category I To carry on the activity of issue management and to act as adviser, consultant, manager, underwriter, portfolio manager. Category II To act as adviser, consultant, co-manager, underwriter, portfolio manager. Category III To act as underwriter, adviser or consultant to an issue. Category IV To act only as adviser or consultant to an issue

NETWORTH Rs.1crore

Rs.50 lakhs

Rs. 20 lakhs

Nil

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Merchant Bankers are classified into 4 categories as shown in the above table having regard to their nature and range of activities and their responsibilities to SEBI, investors and issuers of securities. The minimum net worth and initial authorization 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 finance

The second category consists of those authorized to act in the capacity of comanager/advisor, consultant, and underwriter to an issue or portfolio manager.

The third category consists of those authorized 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.

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CHAPTER 12: REGISTRATION OF MERCHANT BANKER:

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 during the seventeenth and eighteenth centuries. Merchant Banker invested accumulated profits in all kinds of promising activities. Since they added banking business into the profession of Merchant activities and became a Merchant Banker. A distinction was existed in banking systems between moneychanger and exchanger. Moneychangers concentrate on the mutual exchange of different currencies, operated locally and later accepted deposits for security reasons. Passage of time money changers evolved into public or deposit banks whereas exchangers, who operated internationally, engaged in bill-broking that raising foreign exchange and provision of long-term capital for public borrowers. The

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exchanges were remitters and Merchant Bankers. In the seventeenth century, a Merchant Banker was a dealer in bills of exchange who operated with correspondents abroad and speculated on the rate of exchange. Initially, Merchant Bankers were not banks at all and a distinction was drawn between banks, Merchant Banks and other Financial Institutions. Among all these, Institutions it was only banks that accepted deposits from public. Registration with SEBI is mandatory to carry out the business of merchant banking in India. An applicant should comply with the following norms:
y y

The applicant should be a body corporate The applicant should not carry on any business other than those connected with the securities market

The applicant should have necessary infrastructure like office space, equipment, manpower etc.

The applicant must have at least two employees with prior experience in merchant banking

Any associate company, group company, subsidiary or interconnected company of the applicant should not have been a registered merchant banker

The applicant should not have been involved in any securities scam or proved guilt for any offence

The applicant should have a minimum net worth of Rs.5 crores

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CHAPTER 13: CODE OF CONDUCT FOR MERCHANT BANKERS:

1. A merchant banker in the conduct of his business shall observe high standards of integrity and fairness in all his dealings with his clients who other merchant bankers. 2. A merchant banker shall render at all times high standards of service, exercise due diligence, ensure proper care and exercise independent professional judgment. He shall wherever necessary, disclose to the clients, possible sources of conflict of duties and interests while providing unbiased services. 3. a merchant banker shall not make any statement or become privy to any act, practice or unfair competition, which is likely to be harmful to the interests of other merchant bankers or is likely to place such other merchant bankers in a disadvantageous position in relation to the merchant banker, while competing for or executing any assignment. 4. A merchant banker shall not make any exaggerated statement, whether oral or written, to the client either about the qualification or the capability to render certain services or his achievements in regard to services rendered to other clients. 5. A merchant banker shall always endeavor to a. render the best possible advice to the clients having regard to the clients' needs and the environments and his own profession skill; and b. Ensure that all professional dealing are affected in prompt, efficient and cost effective manner.

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6. A merchant banker shall not: a. divulge to other clients, press or any other party any confidential information about his client, which has come to his knowledge; and b. deal in securities of any client company without making disclosure to the Board as required under the regulations and also to the Board of Directors of the client company. 7. A merchant banker shall endeavor to ensure that a. The investors are provided with true and adequate- information without making any misguiding or exaggerated claims and are made aware of attendant risks before any investment decision is taken by them; b. Copies of prospectus, memorandum and related literature are made to the investors; c. Adequate steps are taken for fair allotment of securities and refund of application money without delay; and d. Complaints from investors are adequately dealt; with. 8. The merchant bankers shall not generally and particularly in respect of issue of any securities be party to a. Creation of false market; b. Price rigging or manipulation; c. Passing of price sensitive information to brokers members of the stock exchanges and other play in the capital market or takes any other action, which unethical or unfair to the investors. A merchant banker shall abide by the provisions of the Act, rules and regulations and which may be applicable and relevant to the activities carried on by the merchant banker. Page 36

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CHAPTER 14: Merchant Bankers Commission:

As determined by the Finance Ministry, Government of India, Merchant Bankers are eligible to charge commission/fee from their clients as detailed below: y A Merchant Banker can charge 0.5% as the maximum as commission for whole of the issue. y They can charge project appraisal fees. y A lead manager can claim a commission of 0.5% up to Rs.25 crores and 0.2% in excess of Rs.25 crores. y Underwriting Commission. y Brokerage commission 1.5%. y Other expenses like advertising, printing, Registrars expenses, stamp duty etc., in connection with the issue can be reimbursed from its clients.

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CHAPTER 15: Scope for 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. 1. Growth of New Issues Market: The growth of new issue market is unprecedented since 1990-91. The amount of annual average of capital issues by non-government public companies was only about 90 crores in the 70s, the same rose to over Rs.1,000 crs in the 80s and further to Rs.12,700 crores in the first four years of 1990s. This figure could be well beyond Rs.40,000 crores by the end of 1994-95. The number of capital issues has also increased from 363 in 1990-91 to 900 in 1993-94. The trend is expected to continue in future. 2. Entry of Foreign Investors: An outstanding development in the history of Indian capital market was its opening up in 1992 by allowing 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 of foreign capital through these routes reached 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 investment as also

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investment by NRIs has 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. The increasing number of joint ventures abroad by Indian companies also requires expert services of Merchant Bankers. 3. 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 decentralisation and encouragement of small and medium industries will further increase the demand for technical and financial services which can be provided by merchant bankers. 4. 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 of 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. 5. 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

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rate bonds, auction rated debentures etc. This has further extended the role of Merchant Bankers as market makers for these instruments. 6. Corporate Restructuring : As a result of liberalisation and globalisation the competition in the corporate sector is becoming intense. To survive in the competition, companies are reviewing their strategies, structure and functioning. This has 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. 7. Disinvestments: The government raised Rs.2000 crores through disinvestments 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. The government will sell the shares of identified public sector at any time during the year when they get a good price above minimum stipulated level. This is likely to provide good business to Merchant Bankers in future. The scope of merchant banking is vast and there lies immense opportunities ahead of Merchant Bankers. They should develop adequate infrastructure including expertise in order to provide a full range of merchant banking services to corporate sector.

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CHAPTER 16: THE MODERN MERCHANT BANK

During the 20th century, however, European merchant banks expanded their services. They became increasingly involved in the actual running of the business for which the transaction was conducted. Today, merchant banks actually own and run businesses for their own account, and that of others. Since the 18th century, the term merchant banker has, therefore, been considerably broadened to include a composite of modern day skills. These skills include those inherent in an entrepreneur, a management advisor, a commercial and/or investment banker plus that of a transaction broker. Today a merchant banker is who has the ability to merchandise -- that is, created or expand a need -- and fulfill capital requirements. The modern European merchant bank, in many ways, reflects the early activities and breadth of services of the colonial trading companies.

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CHAPTER 17: Merchant Bankers in the Market Making Process:

The Securities and Exchange Board of India (SEBI) has stated that merchant bankers must be involved more closely in the market making process as share brokers do not have the requisite expertise to evaluate the fundamentals of the scrips before taking over the role of market makers. Further, share brokers generally being partnership firms; do not have the financial clout, which is necessary for market making activity. Resultantly, the SEBI has suggested that any member of the stock exchange, along with one merchant banker registered with SEBI could act as a market maker. The SEBI has felt that to ensure liquidity of scrips, it was necessary to facilitate greater movement, which could only be achieved through the institution of market makers. Market makers would also create a market for scrips by offering two-way quotes to the investors. A minimum of ten scrips has been proposed by SEBI for the market makers.

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CHAPTER 18: Progress of Merchant Banking in India:

Up to 1970, there were only two foreign banks, which performed merchant banking operations in the country. SBI was the first Indian commercial bank and ICICI the first financial institution to take up the activities in 1972 and 1973 respectively. As a result buoyancy in the capital market in 1980s some commercial banks set up their subsidiaries to operate exclusively in merchant banking industry. In addition, a number of large stock broking firms and financial consultants also entered into business. Thus, by the end of the 1980s there were 33 merchant bankers belonging to three major segments viz., commercial banks, all India financial institutions, and private firms. Merchant Banking functions of these institutions was related only to management of new capital issues. Merchant Banking industry, which remained almost stagnant and stereotyped for over two decades, witnessed an astonishing growth after the process of economic reforms and deregulation of Indian economy in 1991. The number of merchant banks increased to 115 by the end of 1992-93, 300 by the end of 1993-94 and 501 by the end of August 1994. All merchant bankers registered with SEBI under four different categories include 50 commercial banks, 6 all India financial institutions ICICI, IFCI, IDBI, IRBI, Tourism Finance Corporation of India, Infrastructure Leasing and Financial Services Ltd. and private merchant bankers.

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In addition to Indian Merchant Bankers, a large number of reputed international Merchant Bankers like Merrill Lynch, Morgan Stanley, Goldman Sachs, Jardie Fleming, Kleinwort Benson etc. are operating in India under authorisation of SEBI. As a result of proliferation, Indian Merchant Bankers are faced with severe competition not only among themselves but also with the well developed global players. The chart presents the merchant banking registered with SEBI classified according to the category.

Merchant Bankers

Public Sector

Private Sector

International Banks 10

Commercial Banks 24

Financial Institutions 6

State Institutions 4

Banks 10

Finance & Investment 231

Leasing

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CHAPTER 19: Problems of Merchant Bankers

SEBI guidelines have authorised 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. SEBI guidelines stipulate a minimum net worth of Rs.1 crore for authorisation of merchant bankers. Small but professional and specialised 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, specialised professionals into merchant banking business. Non co-operation of the issuing companies in timely allotment of securities & 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.

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OBSTACLES:
Merchant bankers have to tap the opportunities lying ahead with the developing pace of the economy. These opportunities arise in the form of challenging before the merchant bankers to test their skills, expertise and efforts to attune their activities with the program of economic development of the country, adopt new instruments and innovative means of financing to meet the growing financial requirements of the corporate clients. Some of the areas of challenges, which have been explored on the basis of research, are classified as under:

I. Merchant bankers' will have to conduct management of capital issues in a different fashion - than what is being was done. If small industries, are to be provided the full benefit of their services of cooperate counseling, project counseling and loan syndication then besides distribution of their securities to the public and arranging long-term institutional or banking finance for them, it would be necessary for merchant banks to make outright purchase of capital issues in Toto and to retain the purchased equity of the company till the implementation of the project, commencement of production and profitable working of the company when the issue may be on premium, so as to make capital gains on that. This course of action will benefit the small industries in many ways; firstly, they will have the quick liquidity and secondly, their project will be implemented under the skilled supervision and expert guidance of the merchant bankers

2. If the planned objective of economic decentralization and rapid development of rural economy is to be achieved merchant bankers will have expert efforts in the interest of the national economy by mobilizing the saving from the rural sector and creating avenues for its investment in rural areas in industry, trade and Page 46

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commerce in different shapes and different magnitude encouraging the local people to espouse entrepreneurship in industrial undertaking in higher degree so as to reduce their dependence on land farming or other means of rural avocations. Alternatively, this poses a big challenge for the merchant bankers to manage the surplus money available with the villagers by holding portfolio on their behalf or channeling it directly to industry in the shape of fixed deposits, etc.

3. Increasing number of sick industries is the ever-growing threat for the industrial economy of the country. Merchant bankers have to fund out ways and means for rehabilitating the sick industries and also devise the manner by which the existing industry might be saved from going sick. They should so closely associate with the nits so as to smell developing weakness in the management of the enterprise and suggest timely action to check any mis-management leading to the sickness of the industrial unit. ,"Management buy-out" is one of the techniques that have been sickness in industry. This device encourages the executive staff of the company to purchase the shareholding of the proprietors and promoters and run the factory on professional basis. Venture capital funds contribute substantially in this area of finance.

4. The millions of small savers are unable to manage their savings in India in both rural and urban areas. These 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 citizens. This may be by taking recourse to encouraging to the "mutual funds".

5. Public and private sector institution engaged in trade, commerce and industry have many times surplus funds lying with them awaiting opportunity outside. The merchant bankers should lap these funds from time to time by mobilizing Page 47

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them to deficit areas on profitable return basis playing the interest rate games.

6. 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 'requisite expertise in the field of international merchant banking.

7. To tap the latest technology available internationally and procure the transfer the technology to India, merchant bankers should frequently make exploring tours to foreign countries, organize meeting and conferences with the Chamber of Commerce and Industry and other commercial, industrial and financial organizations so as to enthuse the foreigners to take interest in investment activity in India. Merchant bankers, therefore, have to take latest information about the economic, socio and political environment of our country to foreign countries and apprise the foreigners with the facilities and relaxations in various rules and regulations of the Government and the policy framework available for their benefit incase they choose to invest in India or lend their technological expertise to Indian entrepreneur and/or to collaborator in any other useful manner.

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CHAPTER 20: 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.

y 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 Sgeneral economic factors. These exercise are done mainly in order to meet the fund requirement of the company taking due cognizance of the investors preference.

y 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

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appraised by as bank/financial instituion, the Merchant Bank undertakes a detailed evaluation of the project before taking up an assignment for issue management.

y Legal aspect The factors that are looked into in case of the legal aspects are:  Compliance with the SEBI guidelinesand the various guidelines issued by the Ministry of Finance and Department of CompanyAffairs.  Pending litigations towards tax liabilities or any criminal/civil prosecution any of the directors for any offenses.  Fair and adequate disclosures in the prospectus.

y 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

y 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, FIIs and NRIs. The second stage is the marketing of the issue to the general public through various vehicles such as press, brokers, etc.

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y 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. period has not officially been announced The duration of this transaction

A Merchant Banker is defined as any person who is engaged in the business of issue management either by making arrangements regarding selling, buying, or subscribing to securities, or acting as manager, consultant, advisor or rendering corporate advisory services in relation to issue management. No person s allowed carrying out any activity as a Merchant Banker unless he or she holds a certificate grated by SEBI.

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CHAPTER 21:

BUSINESS DEVELOPMENT APPROACH AND STRATEGY:

Merchant banking services are highly competitive business activities and to get business, merchant bankers have to stand on their heels and run to grab the business opportunity. Each of the officers in merchant banking department, division, cell or bureau or company should have the requisite skills of marketing and salesman ships to ensure that the opportunity once found is not lost without obtaining mandate from the client. Therefore, a merchant banker has got to be a social person with mixing nature and temperament of liking others.

The sources for locating business opportunities would vary but merchant banker has give rise to new ideas, open avenues to new business and provide scope for additions in the existing business system by way of modification, modernization, diversification, expansion, amalgamation or reconstruction, etc. These sources of information could be the banker whose client is thinking in terms of such ideas; the financial and technical consultancy firms, which are working on such ideas for their clients; licencing authorities of the Central Government or Registration Departments of the State Governments which have been approached for grant of License or for registration of new business activity; financial institutions whose existing borrower clients are taking up new activities or expanding the existing works or which have been approached

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by the prospective borrowers with loan application for grant of financial facilities. A close liaison with these institutions could provide a clue for

business opportunity for a merchant banker.

Besides, the published information in different new dailies, weeklies and fortnightly or monthly magazines provide the source of business opportunity. Such information could be the speeches of business executives, proceedings of annual general meeting of companies specially Chairmans report highlighting future prospects for the company, personal interviews granted to the press people by the top business executives, trade exhibition disseminating useful information, opening opportunities for entrepreneurs to take up new activities, information published by Chamber of Commerce and Industry, house journal of prominent industrial houses, press releases by Government, import Licence or capital goods committees clearance, foreign collaboration permissions, etc. The basic approach for a merchant banker is to maintain close contact with other agencies involved in managing public issues like managing brokers, advertising agencies, firm of registrar to the issue, banks operating as bankers to the issue and advocates/solicitors who have expertise in the area of corporate law and consultancy. These agencies could give clue to the new business opportunity to be explored by the merchant banker. The basic strategy should be to get information, follow-up the same and materialize the business opportunity. To this end, the merchant bankers should frequently join clubs where the business magnates meet and freely mix with them, talk about their future business plans and converse with them on the issues of interest to them, join association or club of merchant bankers and be inquisitive to trace new opportunities for the merchant banking business,

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explore the possibilities of working with existing merchant bankers to the forthcoming public issues or other merchant banking activities. He should develop contacts with agencies like India Investment Centre which is helping the non-resident Indians in getting industrial licences, Central government clearances, foreign collaboration or approval from such like institutions and thus he can get business in areas of credit-syndication, corporate/project consultancy, issue management, portfolio management for NRIs, etc.

In addition to above, merchant banker should take steps to promote new business in the following manner:  Contact frequently the small business owners convince them of business growth through expansion of their activities by forming limited companies, polling resources together through merger and

amalgamation, etc.  Helping private limited companies to convert into limited companies and take up new activities/expansion/modernization/diversification programme etc. and assure them of the requisite help.

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CHAPTER22: CHALLENGES AHEAD:

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 requirements of the corporate clients. Some of the areas of challenges, which have been explored on the basis of research, are classified as under:  Merchant bankers will have to conduct management of capital issues in a different fashion than what is being done at present. If small industries are to be provided the full benefit of their services of corporate counseling, project counseling and loan syndication than besides distributions of their securities to the public and arranging long-term institutional or banking finance for them, it would be necessary for merchant banks to make outright purchase of capital issues in Toto and to retain the purchased equity of the company till the implementation of the project, commencement of production and profitable working of the company when the issue may be treated as good for marketing to the general public, may be on premium, so as to make capital gains on that. This course of action will benefit the smell industries in many ways; firstly, they will have the quick liquidity and secondly, their project will be implemented under the skilled supervision and expert guidance of the merchant bankers. Besides, the investing public

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will be interested in purchasing the issue at premium, having foreseen the dividend paying capacity of the company.  If the planned objective of economic decentralization 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 mobilizing 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 espouse entrepreneurship in industrial undertakings in higher degree so as to reduce their dependence on land farming to other means of rural avocations. Alternatively, this poses a big challenge for the merchant bankers to manage the surplus money available with the villagers by holding portfolio on their behalf or by channelising it directly to industry in the shape of fixed deposits, etc.  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. They

should so closely associate with the units so as to smell developing weakness in the management of the enterprise and suggest timely action to check any mis-management leading to sickness of the industrial unit. Management buy-out is one of the techniques that have been successfully tried in European countries as well as in USA, to check sickness in industry. This device encourages the executive staff of the company to purchase the shareholdings of the proprietors and promoters and run the factory on professional basis. Venture capital funds contribute substantially in this area of finance. Page 56

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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 citizens. This may be by taking recourse to encouraging the mutual funds.  Public 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 mobilizing them to deficit areas on profitable return basis playing the interest rate games as is done in SWAP 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 requisite expertise in the field of international merchant banking.  Attention is required to be gathered to the point that the banks and the financial institutions which re running the Merchant Banking Divisions can think in terms of taking up the activity of providing acceptance credit and re-discounting facility to certain number of their clients on experimental basis on the lines of the traditional activity of European merchant bankers. This will help for creation of secondary market for commercial papers as well.  To tap the latest technology available internationally and procure the transfer of the technology to India, merchant bankers should frequently

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make-exploring tours to foreign countries, organize meetings and conferences with the Chamber of Commerce and Industry and other commercial, industrial and financial organizations so as to enthuse the foreigners to take interest in investment activity in India. Merchant bankers, therefore, have to take latest information about the economic, social and political environment of our country to foreign countries and apprise the foreigners with the facilities and relaxations in various rules and regulations of the Government and the policy framework available for their benefit incase they choose to invest in India or lend their technological expertise to Indian entrepreneur and/or to collaborate in any other useful manner. 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 requirements of financial services for the corporate sector and the community as a whole.

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CHAPTER 23: MERCHANT BANKING-FUTURE DEVELOPMENT:

Time and again the Merchant banking Industry in India witnessed, experienced and underwent significant changes. The very purpose for which these firms are commences their services should be taken care of and they should mould their policy decision and activities to move in tune with the main objectives of Investors protection and to create healthy environment in capital markets. No doubt, Merchant Banking firms are subject to a host of control measures, regulations and rules framed and guided by SEBI. To some extent, frequent changes and /or amendments to policies and control measures, though needed for smooth working of the securities Industry, proves to be detrimental to the very existence of the Merchant Banking system in the country.

The SEBIs Act 1992 confers power upon SEBI to supervise and control the affairs of the Merchant Banking firms in India. It exercises control over the all activities of the Merchant Banking firms through different measures. Assessment of the Merchant Banking firms performance is be set with many difficulties on account of the diverse commercial objectives that influence their performance. Notification of Merchant Banking Regulations and amendments to it from time to time by SEBI brought the Merchant Banking Industry to anew dimension.

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The various studies which had been undertaken in India for evaluating the performance of Merchant Banking firms and the implications of these on securities industry. No single study has been emerged so far pertaining to the evaluation of Merchant Banking firms and in-depth study on their activities as well as operational and financial performance in the light of changing regulatory environment. Hence, this book is an attempt in the direction of penetrating into the subject and to emerge with truth and illuminating comments. In recent past, the small investor has turned his back on the primary capital market. Issue after issue as failed to capture his imagination, rekindle his enthusiasm, and reinforce his faith. He has lost all hopes of appreciation of his investment. And this when all these years millions have though capital market, ate capital market and dreamt capital market. It needed an extraordinary effort and skill the drive the small investor away! High premiums, false premiums and gray market operations. The professed protector of his interests first laid down the dictum of proportionate allotment, then of minimum subscription, all working against his interests. This would make an observant student of the stock market infer that there is some game plan afoot to dethrone the small investor from his prominent; he was believed to be the king. In the primary sector, he enjoyed tremendous power as ho took his own investment decision.

With the coming to SEBI, an organisation that was ostensibly brought into existence to guard the interest of the small investor, hopes ran high that the small investor would now have a safe playing field. But these hopes were soon belied. Far from guarding the interests of the investing public, SEBI embarked on a course of action, which has positively hurt them. The latest fiat of EBI bans corporate advertising after the receipt of acknowledgement card by a Page 60

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company wanting to go public. SEBIs this action has caused the closure of an information window. Now 50 million potential investors are deprived of

official and authentic information given by the Issuer. It is hard to understand reasons for this drastic and totally uncalled for action. While there has been no official explanation for this fiat, there is reason to believe that it may be based on a wrong perception of the role for corporate advertising.

All this has been done perhaps because the corporate and intermediaries is to follow the practices of Western capital markets here, oblivious of the fact that our capital markets are altogether different in structure, in systems and in the number of participants. A vibrant capital market has to be knowledge driven and not regulator driven; it has to be in true with the spirit of a liberal and progressive economy. Freedom of commercial expression could be exploited by some to serve their own ends, just a s freedom of speech and expression could be abused but this has not led our Government to put arbitrary restrictions on our freedom.

Merchant Bankers have reason to believe they will be handicapped without the marketing support. But the worst sufferer would be the investor, especially the small investor it is this class, which forms the backbone of the capital market. As a result of the ban, the small investor would be deprived of the opportunity to study the corporate profile of the Issuer. In the absence of adequate

information, they will have to depend on manipulated facts and information fed by unreliable sources.

Besides, there are larger issuers arising out of SEBIs action. From the point of view of liberalisation of the economy, SEBI has taken a retrograde step. A Page 61

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market economy flourished through bigger markets, higher sales and lesser profits. To achieve this performance, a company needs an aggressive

marketing plan and advertising effort is the main thrust to such a plan. No marketing plan can be worthwhile unless it is backed by an effective advertising plan. The ban imposed by SEBI nips the marketing plan in the bud.

The Indian primary capital market is basically a retail market. It consists of innumerable investors who take own individual investment decisions. Whatever, the system, it is this market that will bring in the funds. If these markets destabilised, the investors will look for alternative avenues to invest their funds. SEBI in its one of the first documents on SEBI and Investor Protection, Development and Regulation of Securities Market clearly specifies significance of regulating capital market and its future plans for fulfilling the twin objectives viz., Development of capital market and investor protection are explained in introductory paragraphs. It speak out that, The decade of the 1980 witnessed a phenomenal growth and development of the securities market, demonstrated its potential not only to mobilize the savings of the horseshold sector but also to allocate it with some degree of efficiency for industrial development. Several factors contributed to the spectacular growth of the market. The dilution of the holdings of the multinational companies at affordable prices in the latter part of the 1970s had generated considerable interest, which was, carries well into the next decade. Several companies came in the early part of the 1980s and successfully raised large resources from the market especially through debt instruments, which further sustained investor interest. There were several changes in Government policy, which significantly influenced industry and aided the market. India was then entering

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the phase of liberalization and decontrol which was to accelerate and gather momentum in the 1980s.

By the end of the decade, the securities market in India came to be firmly integrated with the financial system of the country. With the corporate sector increasingly relying on the securities market for meeting their long-term requirement of funds, the securities market their long-term requirement of funds; the securities market competed on equal terms with the Development Financial Institutions, which were the traditional purveyors of long-term capital. The emergence of the securities markets into the main stream of the financial system of the country was thus one of the major economic processes of the 1980s an inevitable outcome of the maturing process of the financial system. They brought about notable changes in the capital structure of the companies across industries, gave birth to new intermediaries and institutions in the securities market and created a new awareness and interest in investment opportunities in the securities market among investor. In spite market, its quality lagged far behind and there was absence of adequate professionalism and fair competition among the various players in the market. Besides, the regulatory framework then prevailing was fragmented difficult, if not effective.

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CONCLUSION:
The merchant banker plays a vital role in channelising the financial surplus of the society into productive investment avenues. Hence before selecting a merchant banker, one must decide what are the services for which he is being approached. 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 details about Merchant Banking and in future how its 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 predicated 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 an 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.

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QUESTIONS: Name of bank: Canara bank 1) What is the exact procedure that your client should follow for applying your bank as Merchant Bank? Ans: The client can take the information from merchant banking division of our bank 2) What are the Formalities regulating authorities like SEBI for client? Ans: The client should follow the exact norms of SEBI and should not voilate the rules 3) What are the Formalities regulating authorities like SEBI for Bank? Ans: The bank should not violate the rules and regulation of SEBI and should protect the investors 4) What is the General time required to finish the formalities? Ans: It depends on services demanded by the client For e.g :for issue of ipo it take 6months to 7months. 5) What should be the eligible criteria for your client to apply your bank as Merchant Bank? Ans: the client should apply to authorized body like sebi and issued share capital for category-1 RS 1crore and for category -2 RS 50lakhs.

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BIBLOGRAPHY

j Financial Services & Market Book by Deepak Abhyankar. j Financial Market & Services Book by Gordon & Natrajan. j Merchant Banker Book by H. R. Suneja.

WIBLOGRAPHY

j www.scribd.com j www.google.com j www.sebi.com j www.yahoo.com j www.hdfcsecurities.com Special Thanks to Prof. Antony Lawrence Project by Pooja .A. Lalwani
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