Merchant Banker

INTRODUCTION
• The Concept of Merchant Banking came into India in 1972
when SBI initiated a branch or division of Merchant Banking.
• Different countries have different terminologies for this aspect:
• U.K - Issue House
• U.S.A - Investment Bank
• India – Merchant Bank
• The basic and primary responsibility of Merchant banker is to
look after the management when the company issues new
shares and securities.
• It is statutory for every bank engaged in merchant banking to
get itself registered with SEBI.
 Need for MB in India
• Post 1980 , there were lot of new industries that
developed in India and the prerequisite for any kind of
development is “Finance”.
• The way to raise Finance on high scale is to raise the
funds from public and this fund can be raised by issuing
shares and to adopt this way of raising funds as per
SEBI guidelines they have to have a Merchant Banker.
• When there were mega issues such as in the case of
Reliance Power where there was flood of money and to
manage the same became difficult and so there
increased the number of Merchant bankers from one to
four.
 DEFINITION
• According to Rule 2 (e) of SEBI (Merchant Bankers)
Rules, 1922

“A Merchant Banker means any person who is engaged

in the business of Issue Management either by
making arrangements regarding selling, buying or
subscribing to Securities as Manager, Consultant,
Adviser of rendering Corporate Advisory Service in
relation to such Issue Management”
 DEFINITION
• It acts an intermediary between the Issuers and the
ultimate purchaser of the securities in the primary
market.
• It has been made statutory by SEBI to carry out
functioning through Merchant bankers.
 MERCHANT BANKING
ORGANISATION
• SEBI has divided Merchant Banking in 4
categories:
 MERCHANT BANKING
ORGANISATION
• Given the above provisions, the role of lead managers
of an issue could be fulfilled only by merchant bankers
registered under Category-I alone. From 9 December
1997, however, all other categories were abolished, and
merchant bankers can now only be registered under
Category-I by SEBI.
 CAPITAL ADEQUACY
NORMS
• The Securities Exchange Board of India (SEBI) has
prescribed capital adequacy norms for merchant bankers
to register under the various categories.
• The minimum ‘net worth’ set by SEBI for Category-I of
merchant bankers was initially fixed at the value of Rs. 1
crore and later raised to the value of Rs. 5 crore through
an amendment of the regulations in the year 1995.
 SEBI GUIDELINES
1. The merchant banking activity in India is governed by SEBI
(merchant bankers) regulations, 1992. Registration with SEBI is
mandatory to carry out the business of merchant banking in India.
An applicant should comply with the following norms:
I. the applicant should be a corporate body.
II. the applicant should not carry on any business other than
those connected with the securities market.
III. the applicant should have necessary Infrastructure like office
space, equipment, manpower, etc.
IV. the applicant must have at least two employees with prior
experience in merchant banking.
V. any associate company, group company, subsidiary or Interconnected
company of the applicant should not have been a registered
merchant banker.
 SEBI GUIDELINES
2. Every merchant banker should maintain copy of balance
sheet, Profit and loss account, statement of financial position.
3. Half-yearly unaudited result should be submitted to SEBI.
4. Merchant bankers are prohibited from buying securities
based on the unpublished price sensitive information of their
clients.
5. SEBI has been vested with the power to suspend or cancel
the authorization in case of violation of the guidelines.
6. Every merchant banker shall appoint a 'Compliance Officer'
to monitor compliance of the Act.
7. SEBI has the right to send inspecting authority to inspect
books of accounts, records etc. of merchant bankers.
 SEBI GUIDELINES
8. Inspections will be conducted by SEBI to ensure
that provisions of the regulations are properly
complied.
9. SEBI will give authorization for a merchant banker to
operate for 3 years only. Without SEBI's authorization,
merchant bankers cannot operate.
10. An initial authorization fee, an annual fee and
renewal fee may be collected by SEBI.
11. A lead manager holding a certificate under category I
shall accept a minimum underwriting obligation of 5% of
size of issue or Rs.25 whichever is less.
 SEBI GUIDELINES
12. The number of lead merchant bankers may not, exceed
in case of any issue of Size of issue No. of Merchant
Bankers
a) Less than Rs.50 crore
b) Rs.50 crore but less than Rs.100 crore
c) Rs.100 crore but less than Rs.200 crore
d) Rs.200 crore but less than Rs.400 crore
e) Above Rs.400 crore five or more as may be agreed
by the board.
Role Of Merchant
Bankers
 Raising Finance
• Merchant Bankers help their clients in raising finance
by way of
– issue of a debenture,
– shares,
– bank loans, etc.
• They tap both the domestic as well as the international
markets.
• Finance raised by this method may be used for
commencing a new project or business or it may even be
used for expansion and modernization of an existing
business.
 Promotional Activities
• In India, merchant bankers play the role of promoter of
industrial enterprises.
• They help entrepreneurs in
– conceiving ideas,
– identifying projects,
– preparation of feasibility reports,
– getting Government approvals as well as
incentives, etc.
• Merchant bankers may, at times, also provide assistance
in financial and technical collaborations and joint
ventures.
 Brokers in Stock Exchanges
• Merchant bankers buy and sell shares in the stock
exchange on behalf of the clients.
• They additionally conduct researches on equity
shares, advise the clients on the share to be
purchased, the time of purchase, quantity of such
purchase and the time for selling these shares.
• Mutual funds offer merchant banking services, large
brokers, investment banks, and venture capitals.
 Project
Management
• Merchant bankers offer help to clients in several ways in
the process of project management.
• They offer advice regarding :
– the location of the project,
– preparation of project report,
– in carrying out feasibility studies,
– planning out the financing of the project,
– tapping sources of such finance,
– information regarding incentives and
– concessions from the government.
 Advise on Modernisation
and Expansion

• Merchant bankers advise on amalgamations, mergers,

acquisitions, takeovers, foreign collaborations,
diversification of business, technology up-gradation,
joint-ventures, etc.
 Managing Public
Issue
• Services provided by MB in the below stated process :
– the timing of the public issue
– the size of the issue
– the price of the issue
– acting in the capacity of manager to the issue
– assisting in receiving applications as well as allotment of
securities
– appointment of brokers as well as underwriters of the issue
– listing of the shares on the relevant stock exchange.
• A merchant banker acts as experts on the terms, type and timing
of the issues of the corporate securities and makes them suitable
for investors and provides freedom and flexibility to issuing
companies.
 Credit Syndication
• A merchant banker provides specialized services in the
stages of preparation of a project, the loan applications
required for the raising of short-term and long- term
credit from various banks and financials institutions, etc.
• They help in managing Euro-issues and raising funds
abroad.
 Handling Govt. Consent for
Industrial Projects
• A merchant banker completes all formalities for his or
her client, about government permission to expand and
modernize businessand commencing new businesses.
 Special Assistance
to Entrepreneurs and Small
Co.
• Merchant banker advises entrepreneurs and small
companies on
– availability and existence of business opportunities,
– concessions, incentives and government policies and
– helps them to take advantage of this option
available to them, to the best of their capabilities.
 Services to PSU’s
• Merchant banker offers numerous services to public
sector undertakings and units and their public
• utilities.
They assist in raising capital (long-term), in the
marketing of securities, in foreign collaborations as well
as in arranging for long-term finances from lending
institutions.
 Revival Of Sick
Units
• A merchant bank helps in reviving sick industrial units.
• They negotiate with various agencies such as
banks, long-term lending institutions, and the Board
for Industrial and Financial Reconstruction (BIFR).
• They also plan and execute full revival packages
 Portfolio Mgmt. of Sick
Units
• Merchant bankers offer revival services to companies
that issue the securities as well as investors.
• These bankers advise clients, which are usually
institutional investors, on investment decisions.
• They undertake purchase and sale of securities to
provide them with portfolio management services.
• Some of these bankers are operating mutual funds as
well as offshore funds.
 Corporate
Restructuring
• These services of merchant bankers include :
– mergers, acquisitions (about existing units),
– the sale of units and disinvestment.
• These procedures demand proper negotiations,
thorough preparation of numerous documents and
completion of lengthy legal formalities.
• Merchant bankers fulfill all these formalities on behalf of
the clients.
 Money Market
Operations
• A merchant bank deals with as well as underwrites short-
term instruments like:
• government bonds
• certificate of deposit issued by banks and
financial institutions
• commercial paper issued by large corporate firms
• treasury bills issued by the government (in India by the
Reserve Bank of India)
 Servicing Issues
• Merchant bankers now also act as the paying agents for
service of the debt- securities and act as the registrars
as well as the transfer agents.
• In this way, they maintain the registers of the
shareholders and the debenture holders and also
arrange the payment of dividend and or the interest that
is due to them.
 Leasing and Finance
Services
• Merchant banks also assist leasing and
financing services.
• A lease refers to a contract that exists between a lessor
and a lessee, by which the lessor permits the use of a
specific asset that belongs to him or her(like equipment,
land) by the lessee for a specified period.
• Several merchant bankers offer leasing and financing
facilities to the customers.
• Some banks also keep venture capital funds to assist
entrepreneurs.
• These banks also help the companies to raise finance
through public deposits.
 Management Of Dividend &
Interest
• Merchant banks help the clients in the management of
the interest on the debentures or loans, as well as the
dividend on the shares.
• In addition to this, they advise the client with respect to
the timings (whether interim or annual) of the dividend as
well as the rate of the dividend.
 Other Services
• Along with all the services mentioned above, the merchant
bankers also offer certain other specialized services such
as :
– advisory services on matters such as
mergers, amalgamations,
– tax related matters,
– on the matter of recruitment of executives,
– the cost of audit as well as its management among
several others.
• The scope of functions, activities and the services
provided by the merchant bankers are ever increasing
and growing with the constant development in the
money market.
QUALITIES
OF
MERCHANT
BANKERS
 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
which will depend upon his own communication skills.
• A good merchant banker is one who does not allow his
client to think anything outside except what has been
advised.
 Cooperation And
Friendliness
• These two characteristics are the symbols of good
leadership coupled with persuasiveness are the main
instruments with which a Merchant Banker mixes with
the people , gathers information, obtain business
mandates and renders satisfactory services to the
clients.
 Contacts
• Success of Merchant banker depends on his sociable
nature and the richness of wider networks or contacts.
• A merchant banker is suppose to get acquainted deeply
with Government officers where compliance under
various enactments are to be reported , Indian and
foreign banks , advocates and solicitors and every other
person whose services are to be availed of in executing
Merchant banking assignments.
 Attitude TowardsProblem
Solving
• The important trait of MB is his attitude towards problem
solving.
• Every client who approaches MB should return fully
satisfied by services rendered.
• Positive approach to understand adverse circumstances
and other’s viewpoint is only possible if the person is
skilled in human relations particularly in inter and intra
personal behavior.
• Effective communication and Proper feedback are
requisites for creating positive attitude towards problem
solving.
 Readiness to acquire New
skills and Information
• MB should keep themselves updated with the latest
information in the area of service product , they market.
• This is possible only when the MB possess the quality
of being feasible to adapt changes and also adapt new
skills in order to carry out the proceedings.
RESPONSIBILITIE
S OF MERCHANT
BANKER
 To The Investors
• Investor protection is fundamental to a healthy growth of
the capital market.
• Protection is not about compensating for the losses
suffered.
• It is the vital responsibility of the merchant banker to
ensure the completeness of the disclosures in view of
the fact that entire reliance is based on offer document
either prospectus because in independent agency like
merchant bankers has done the scrutiny.
 Capital Structuring
• The merchant bankers while designing the capital
structure take into account the various factors such as
leverage effect on earnings per share, the project cost,
cash flow ability of the company, cost of capital and size
of the company.
• These exercises are done mainly in order to meet the
fund requirements of the company.
 Project Evaluation & Due
Diligence
• It is the major responsibility of MB
• When a Project has already been appraised by banks
or financial institutions , MB relies on the said appraisal
before accepting the assignment.
• If the Project is not appraised by banks , MB itself has to
undertake detailed evaluation of the project before
taking up the assignment.
 Legal Aspects
• Compliance with the SEBI guidelines and with that of
Ministry Of Finance and Department of Corporate
Affairs.
• Pending Litigation with tax liabilities or any
criminal/civil prosecution , of directors for any
• offences.
Fair and Adequate disclosures in the Prospectus.
 Marketing of the
Issue
• Marketing of the issue is the vital responsibility of
the Merchant Banker.

1. The First Stage is Pre Issue Marketing for the placement

of the issue with Financial Institutions , Banks , Mutual
Funds and FII.

2. The Second Stage is the marketing of the issue to the

general public through various mediums such as press,
brokers etc.
 MERCHANT
BANKERS
• IN INDIA
Currently Merchant Banking activity has mushroomed in
the Indian capital market with both public & private sector
settings up their respective merchant Banking divisions.
• Currently, the total no. of merchant bankers in India are
approx. 1450 with more than 930 registered with SEBI.
•
The SEBI authorized Merchant Bankers Include merchant
Banking divisions of All India Financial Institutions,
nationalized & foreign banks, subsidies of the commercial
banks, private merchant banks engaged in stock broking,
underwriting activities & financial consultancy & investment
advisory service firms.
TOP MERCHANT BANKERS
IN INDIA
 SEBI DISCARDED
MERCHANT BANKERS
• The Reserve Bank of India (RBI) on Thursday said it
has cancelled the licence of Jamkhed Merchants Co-
operative Bank Maryadit in Ahmednagar district of
Maharashtra.
• The order was made effective from the close of business
on June 01, 2017, RBI statement was put on the
website.
• The Reserve Bank cancelled the licence of the bank as
the bank did not comply with certain legal provisions
and "its operations were being carried out in a manner
detrimental to the interest of the present and future
depositors and that of the public."
 Suspended
Merchant Banks
• The Securities and Exchange Board of
India (Sebi) has suspended the
registration certificate of Almondz Global
Securities as a merchant banker for 6
months for violating norms in the initial
public offer (IPO) of Bharatiya Global
Infomedia Ltd (BGIL).
 Penalties Charged
Merchant Banks
• Edelweiss Financial Services Ltd on Friday said the market
regulator has imposed a Rs1 crore fine on the firm and two other
merchant bankers, SBI Capital Markets Ltd and Axis Capital Ltd
(formerly Enam Securities), for non-disclosure of important facts in
the initial public offering (IPO) prospectus of Electro Steels Ltd in
2010.
• The Securities and Exchange Board of India (SEBI) had imposed a
penalty of Rs 1 crore on six investment banks that handled the initial
public offering (IPO) of rating agency Credit Analysis and Research
(CARE).
• The six — Kotak Mahindra Capital, DSP Merrill
Lynch, Edelweiss Financial Services, ICICI Securities, IDBI Capital
Market Services and SBI Capital Market Services — were charged
for failing to make adequate disclosure in CARE’s offer document.