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CONTENTS S. No.

Particulars 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Executive Summary Introduction Definition of Merchant Banking The Advent and Emergence of Merchant Banking Types of Merchant Banks Structure of a Merchant Bank Functions of a Merchant Bank Comparison between a Merchant Bank, Commercial Bank & Investment Bank Registration of a Merchant Bank Amount of Capital in Merchant Banks Existing Players in Merchant Banking Demand for Merchant Banking Legal Regulations Relating to Merchant Banking Maintenance of Books and Records Limitations of Merchant Banking Cancellation of Registration Association of Merchant Bankers of India (AMBI) Conclusion Bibliography 9 10 10 9 9 8 8 6 7 8 8 Page No. 2 2 2 2 2 5 5 5

MERCHANT BANKING

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Executive Summary

This report brings out the aspect of merchant banking in the financial services sector with due regard to its origins, services offered and scope for future business opportunities. It also puts forth the various rules and regulations regarding the registration of a merchant banker, duties and cancellation of licenses of merchant bankers and throws light on the existing players in India. Merchant banking is an area that is of great importance to companies that are willing to raise capital through stock exchanges and it is necessary for such companies to comply with the legal and statutory frameworks that have been laid. Hence, merchant banking is an integral part of the process of raising capital in this manner by the companies interested. The report also throws light on the various guidelines as to the formation, registration and cancellation of license of a merchant banker and also gives the current scheme of things in this sector of business finance. 2 Introduction

Merchant banking is extremely useful to companies wanting to raise money through issuing shares and to avail advisory services to maintain their funds. A merchant banker acts an interface between the company, the stock market, SEBI and subscribers of the shares issued by it. A merchant banker provides a wide range of services dedicated to the needs of his clients. Merchant banking relies on a number of factors such as the nature of the company, existing economic scenario of the region, investors sentiments, regulations laid down by the regulating authority, etc. and policies that are to come. It is an upcoming field of business venture with several well-known names in the industry being involved. Merchant bankers are primary market intermediaries. The lead manager needs to ensure the correctness of the information mentioned in the offer document and have to comply with the acts, rules and regulations laid down by SEBI and work in the interests of investors. SEBIs guidelines were framed to enhance the standard of disclosures. 3 Definition of Merchant Banking

As defined by SEBI in its rules regarding Merchant Banking, 1992, a merchant banker is any person who is engaged in the business of issue management either by making arrangements regarding buying or subscribing securities as a manager, consultant, advisor, or renders corporate advisory services in relation to such issue management. A person involved in the activities stated above is a merchant banker. 4 The Advent and Emergence of Merchant Banking

Grindlays Bank was the first to start merchant banking services in the year 1967. This followed by the First National City Bank in 1970 and subsequently followed by State Bank of India in 1972, through the setting up of its Merchant Banking Division. Following this action taken by SBI, other banks such as Canara Bank, Bank of Baroda, UCO Bank and other banks subsequently followed suit over the next couple of decades. 5 Types of Merchant Banks

Merchant bankers have been classified into four types. They are:

Calegory I to deal in issue management, to act as a capital market advisor, consultant, underwriter and a portfolio manager. Example: Canbank Merchant Banking Services Division of Canara Bank

Net worth to be maintained:

Category I

- Rs. 5 crores

The process of registration of a merchant banking is as follows: Application to SEBI under Form-A of SEBI (Merchant Bankers) Regulation Act 1992 should be made Once SEBI is satisfied with the details in the application, it will issue a certificate of registration under Form-B of the same Act An amount of Rs. 5 lakhs should be paid within 15 days of the date of receipt of intimation regarding the issuance of the certificate

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This certificate of registration is valid for a period of 3 years With 3 months remaining for the merchant banker, if willing, can renew the registration by filing an application under Form-A of the same Act Upon the scrutiny of the application by SEBI and once it is satisfied by its contents, it renews the merchant bankers registration for another 3 years Finally, a sum of Rs. 2.5 lakhs should be paid within 15 days of the date of receipt of intimation regarding the renewal of the certificate of registration

The initial license fee for various categories of merchant bankers is as follows: Category I Rs. 2.5 lakhs for the first 2 years and Rs. 1 lakh for the third

A merchant banker, if desires, needs to pay a renewal fee as under: Category I Rs. 1 lakh for the 1st 2 years from date of each renewal and Rs. 20,000 for the third

The second category is:

Category II to deal in merchant banking services such as advising, consulting, managing portfolios and to act as an underwriter. Example: Nucleus Financial Services Pvt. Ltd.

Net worth to be maintained:

Category II

- Rs. 50 lakhs

The process of registration of a merchant banking is as follows: Application to SEBI under Form-A of SEBI (Merchant Bankers) Regulation Act 1992 should be made Once SEBI is satisfied with the details in the application, it will issue a certificate of registration under Form-B of the same Act An amount of Rs. 5 lakhs should be paid within 15 days of the date of receipt of intimation regarding the issuance of the certificate This certificate of registration is valid for a period of 3 years With 3 months remaining for the merchant banker, if willing, can renew the registration by filing an application under Form-A of the same Act Upon the scrutiny of the application by SEBI and once it is satisfied by its contents, it renews the merchant bankers registration for another 3 years Finally, a sum of Rs. 2.5 lakhs should be paid within 15 days of the date of receipt of intimation regarding the renewal of the certificate of registration

The initial license fee for various categories of merchant bankers is as follows: Category II Rs. 1.5 lakhs for the first 2 years and Rs. 50,000 for the third

A merchant banker, if desires, needs to pay a renewal fee as under:

Category II

Rs. 75,000 for the 1st 2 years from date of each renewal and Rs. 10,000 for the third

The third category is:

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Category III to act as an underwriter and as an advisor to an issue. Example: Karnataka Financial Services

Net worth to be maintained:

Category III

- Rs. 20 lakhs

The process of registration of a merchant banking is as follows: Application to SEBI under Form-A of SEBI (Merchant Bankers) Regulation Act 1992 should be made Once SEBI is satisfied with the details in the application, it will issue a certificate of registration under Form-B of the same Act An amount of Rs. 5 lakhs should be paid within 15 days of the date of receipt of intimation regarding the issuance of the certificate This certificate of registration is valid for a period of 3 years With 3 months remaining for the merchant banker, if willing, can renew the registration by filing an application under Form-A of the same Act Upon the scrutiny of the application by SEBI and once it is satisfied by its contents, it renews the merchant bankers registration for another 3 years Finally, a sum of Rs. 2.5 lakhs should be paid within 15 days of the date of receipt of intimation regarding the renewal of the certificate of registration

The initial license fee for various categories of merchant bankers is as follows: Category III Rs. 1 lakh for the first 2 years and Rs. 25,000 for the third

A merchant banker, if desires, needs to pay a renewal fee as under:

Category III Rs. 50,000 for the 1st 2 years from date of each renewal and Rs. 5,000 for the third

The last category of merchant bankers is:

Category IV to act only as an advisor or as a consultant to an issue.

Net worth to be maintained:

Category IV

- Nil

The process of registration of a merchant banking is as follows: Application to SEBI under Form-A of SEBI (Merchant Bankers) Regulation Act 1992 should be made Once SEBI is satisfied with the details in the application, it will issue a certificate of registration under Form-B of the same Act An amount of Rs. 5 lakhs should be paid within 15 days of the date of receipt of intimation regarding the issuance of the certificate This certificate of registration is valid for a period of 3 years With 3 months remaining for the merchant banker, if willing, can renew the registration by filing an application under Form-A of the same Act Upon the scrutiny of the application by SEBI and once it is satisfied by its contents, it renews the merchant bankers registration for another 3 years

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Finally, a sum of Rs. 2.5 lakhs should be paid within 15 days of the date of receipt of intimation regarding the renewal of the certificate of registration

The initial license fee for various categories of merchant bankers is as follows: Category IV Rs. 5,000 for the first 2 years and Rs. 1,000 for the third

A merchant banker, if desires, needs to pay a renewal fee as under:

Category IV Rs. 5,000 for the 1st 2 years from date of each renewal and Rs. 2,500 for the third

Structure of a Merchant Bank

The organisation structure of a merchant banker has to be clearly depicted in the form of an organisation chart that denotes the functional responsibilities of the various merchant banking activities. A minimum of two persons is required for being recognised as a merchant banker. The merchant banker must specify organisation structure in its initial application under Form A. Merchant bankers must have well-qualified, knowledgeable and employees with prior experience in merchant banking activities to get the approval to operate as a merchant banker.

Functions of a Merchant Bank

Merchant banks provide valuable services to companies such as counselling on projects, consultancies, oversee the implementation of projects, issuing prospectus, assist in mobilising funds from within the country as well as from abroad including IPOs with the help of lead managers, help in raising working capital, FCCBs for its clients and also advice on mergers and acquisitions. It focuses on issue management, wherein it deals with obtaining clearances, drafting of prospectus, underwriting, maintaining good rapport with banks to negotiate proposals and dealing in communication with investors. In addition, merchant bankers also deal in credit syndication , working capital financing, lease financing and even treasury management. In the process of an issue of shares by a company, the lead manager of the merchant banker takes up the due diligence of the companys operations, business plan, etc. and involves himself in the activities of drafting offer documents, prospectus, mandatory statutory advertisements in English and vernacular dailies and assist in the completion of formalities relating to stock exchanges. During the post issue stage, the lead manager plays a vital role in managing escrow accounts, intimating allocation and facilitating refunds to bidders. 8 S.No. 1 Comparison between a Merchant Bank, Commercial Bank & Investment Bank Merchant Bank Facilitates in raising funds through stock market and public issues Commercial Bank Provides funds and loans to customers and performs tests of creditworthiness Investment Bank Analyses various opportunities for investing and raising funds from different sources Provides consultancy services to clients on projects and deals in credit syndication from interested lenders of It deals with international financing alternatives, facilitating and financing mergers and acquisitions GoldmanSachs,JPMorgan, Bank of America, etc.

Advices client on maintaining capital and other financial consultancy services

Does not do so

Does not provide regular banking services to public and deals in financing companies

Involved in the provision regular banking services

SBI Capital Markets, Capital Ltd, etc.

Edelweiss

Eg. SBI, ICICI, PNB, etc.

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Registration of a Merchant Bank

Every merchant banker is required to be registered with the Securities and Exchange Board of India (SEBI). A merchant banker must be a body corporate except that of being an NBFC. For the purpose of registration, SEBI has classified merchant bankers into four categories for:

Issue Management (Category I) Underwriting (Category II) Consultants to issue (Category III) Mobilising foreign funds (Category IV)

SEBI will grant the certificate of registration to a merchant banker only if: The merchant banker is a body corporate and not an NBFC There is a registered office There are a minimum of two employees with prior experience in merchant banking It is not connected with any company directly or indirectly It has not been involved in any litigation with stock exchanges It deals only in securities

The process of registration of a merchant banking is as follows: Application to SEBI under Form-A of SEBI (Merchant Bankers) Regulation Act 1992 should be made Once SEBI is satisfied with the details in the application, it will issue a certificate of registration under Form-B of the same Act An amount of Rs. 5 lakhs should be paid within 15 days of the date of receipt of intimation regarding the issuance of the certificate This certificate of registration is valid for a period of 3 years With 3 months remaining for the merchant banker, if willing, can renew the registration by filing an application under Form-A of the same Act Upon the scrutiny of the application by SEBI and once it is satisfied by its contents, it renews the merchant bankers registration for another 3 years Finally, a sum of Rs. 2.5 lakhs should be paid within 15 days of the date of receipt of intimation regarding the renewal of the certificate of registration

The initial license fee for various categories of merchant bankers is as follows:

Category I

Rs. 2.5 lakhs for the first 2 years and Rs. 1 lakh for the third

Category II Rs. 1.5 lakhs for the first 2 years and Rs. 50,000 for the third Category III Rs. 1 lakh for the first 2 years and Rs. 25,000 for the third Category IV Rs. 5,000 for the first 2 years and Rs. 1,000 for the third

These licenses may be renewed by a merchant banker after expiry of such period.

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A merchant banker, if desires, needs to pay a renewal fee as under:

Category I third Category II third

Rs. 1 lakh for the 1st 2 years from date of each renewal and Rs. 20,000 for the

Rs. 75,000 for the 1st 2 years from date of each renewal and Rs. 10,000 for the

Category III Rs. 50,000 for the 1st 2 years from date of each renewal and Rs. 5,000 for the third Category IV Rs. 5,000 for the 1st 2 years from date of each renewal and Rs. 2,500 for the third

In addition to the requirements stated in Form A, certain additions have been made. They are: MoA and AoA of the applicant Unique Identification Number of the applicant Details of directors and shareholding pattern Details of key persons Details of facilities Details regarding registration as an NBFC Accounts of the applicant A report from the principal bankers Details of associated registered intermediaries Declaration by atleast two directors

SEBI normally sends a reply within 30 days of application for renewal of license by a merchant banker. In case of applications submitted with incomplete or vague information or are submitted without relevant supporting documents, 10 Amount of Capital in Merchant Banks

As per the rules laid down by SEBI, a merchant banker is required to have a minimum net worth of Rs. 5 crores. However, different categories of merchant bankers warrant different levels of minimum net worth.

Category I Category II Category III Category IV

- Rs. 5 crores - Rs. 50 lakhs - Rs. 20 lakhs - Nil

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Existing Players in Merchant Banking

The Indian capital market now consists of several eminent players such as Canara Bank, SBI, ICICI, etc. These banks have created a separate division meant for the purpose of merchant banking such as Canbank, SBI Capital Markets, Citibank, HDFC Bank, Kotak Mahindra Bank, etc. Over the years, several private entities such as Birla,

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Reliance, Religare, etc. have also emerged. These play a pivotal role in raising funds through the stock market that their clients wish to have for their business. 12 Demand for Merchant Banking

Businesses are faced with constant requirement of funds for their operations and for expansions. The capital market proves to be a resource to avail large amounts of such funds at one-go within a short timeframe. The need for organisations to be assisted rightly in decisions of raising and managing funds, in complying with the set rules and regulation as per the legal framework, in syndicating loans for their business, etc., has become imperative. With the country growing at a fast pace, with expectations of it to being better in the coming years and with increasing levels of population and incomes, the demand for merchant banking is undoubtedly on an upward trend. 13 Legal Regulations Relating to Merchant Banking

The activities of merchant bankers in India are regulated by SEBI under the SEBI (Merchant Bankers) Regulations 1992. Merchant bankers need to submit a periodic report from time to time as may be specified by SEBI, as per the amendment made to the regulations in March 2012. Certain disclosures are mandatorily to be made to SEBI regarding details of formation of the merchant banker. A merchant banker must appoint a Compliance Officer who monitors the rules, regulations and other notifications issued by SEBI or the Central Government and must report his findings to SEBI. A merchant banker must exhibit integrity and must work in the interest of investors. Only a merchant banker possessing a valid registration under SEBI in accordance with the SEBI (Merchant Bankers) Regulation Act 1992 is eligible to act as a Book Running Lead Manager to an issue. A merchant banker must not divulge confidential details relating to the client orally or in writing except when they are required as per law that is in force for the specific period of time. A merchant banker has to rectify the deficiencies mentioned in the Auditors Report within two months. A merchant banker cannot involve himself in merchant banking activities during the period of suspension and cannot perform such activities once his license is cancelled. The lead manager who is responsible for verification of the contents of the letter of offer and prospectus must submit to SEBI a due diligence certificate in Form C two weeks prior to the issue of shares for subscription. Maintenance of Books and Records

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A merchant banker is required to maintain the following: A copy of the Balance Sheet as at the end of every accounting period A copy of the Profit and Loss Statement for the respective period A copy of the Auditors Report on the accounts for the period A statement of the financial position Half-yearly unaudited statements to be submitted to SEBI Copies of balance sheet, profit and loss account and other such financial statements for the preceeding five years of the present accounting period, whenever requested by SEBI. Limitations of Merchant Banking

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One of the restrictions imposed on merchant bankers is the need to maintain high capital adequacy of net worth of Rs. 5 crores stipulated by SEBI. Also, merchant bankers may face non co-operation from the issuing company regarding the allotment and refund of the shares and funds collected, etc. The field of merchant banking requires adequate expertise, experience and knowledge and mandates well qualified and experienced persons to deal with securities and the capital market. 16 Cancellation of Registration

A violation of the rules and regulations that are laid down by SEBI would invoke either of the following: Suspension of registration Cancellation of registration

Suspension of registration is applicable when: If the merchant banker fails to provide the mandatory information required If it fails to resolve complaints by investors or fails to give a satisfactory reply to SEBI If it indulges in malpractices such as manipulation, price rigging or cornering If it fails to adhere to the stipulated capital adequacy norms

Cancellation of registration is applicable when:

If the merchant banker is guilty of fraud or convicted of a criminal offence If it works against the interests of the investor If it deals in wilful malpractices such as price rigging and cornering If it is involved in repeated defaults and if SEBI mentions the reasons in writing If its capital adequacy is abysmally low and that if the SEBI thinks that the merchant banker is unfit to work in the interest of investors

In recent years, SEBI has debarred merchant bankers such as PNB Investments and few others for overlooking misstatements in the prospectus and non-disclosure of relevant facts.

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Association of Merchant Bankers of India (AMBI)

The Association of Merchant Bankers of India, commonly referred to as AMBI, had been an organisation of several merchant bankers across India to serve as a platform to share commonalities, spread ethics and the code of conduct laid down and also act as a body of like-minded merchant bankers to represent their fraternity. SEBU during the year 1995-96 took steps to promote and regulate self regulatory organisations such as the AMBI. Initially, a separate body, it is now a part of the Association of Investor Bankers of India (AIBI), with its head office at Marine Drive, Mumbai.

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Conclusion

Merchant banking thus plays an important role in raising capital for a company through the capital market. It is an integral part of a companys future goals of expansion, modernisation, diversification and taking new projects. Merchant banking involves several services such as counselling and advisory services on raising capital through the stock exchanges, assisting in the companys capital structure decisions and help in raising foreign currency

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funds also. With many new opportunities springing up in the field of business, merchant banking proves to be a lucrative field of corporate consultancy and financing. 19 Bibliography

http://www.sebi.gov.in/acts/mbregu.html#ch2j http://www.sebi.gov.in/acts/act09main1.html

http://www.sebi.gov.in/cms/sebi_data/docfiles/21194_t.html http://iepf.gov.in/IEPF/Key_Intermediaries.html http://www.sebi.gov.in/acts/Merchantbankers.pdf http://www.sebi.gov.in/acts/mbregu.html http://www.sebi.gov.in/cms/sebi_data/attachdocs/1331100044276.pdf http://www.sebi.gov.in/annualreport/9697/pt1b4.html http://www.aibi.org.in/

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