This is the Project Report to

understanding the Merchant Banking

in India, it includes most of the
information related to it.

Merchant
Banking in
India
-AYUSHI TYAGI

RD Engineering College, Duhai

 A MINI PROJECT
REPORT
Merchant Banking in India
SUBMITTED FOR THE PARTIAL
FULFILLMENT OF THE REQUIREMENT
FOR THE AWARD
OF
MASTER OF BUSINESS
ADMINISTRATION (BATCH 2021-22)

AFFILIATED TO:
Dr. APJ Abdul Kalam Technical University, Lucknow

SUBMITTED TO: SUBMITTED BY:

Prof. PANKAY PANDEY AYUSHI TYAGI
(Assistant Prof.) 2102310700016

MBA 2nd Semester

RD ENGINEERING COLLEGE, DUHAI,

GHAZIABAD
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 CERTIFICATE
This is to certify that the Project Report entitled “MERCHANT
BANKING IN INDIA” submitted by AYUSHI TYAGI, student of
Master Business of Administration (MBA) – RD Engineering College
University is a record of work done under my supervision.

This is also to certify that this report is an original project submitted as a

part of the curriculum and no unfair means like copying have been used
for its completion. All references have been duly acknowledged.

Professor Pankaj Pandey

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 EXECUTIVE SUMMARY

This is an attempt to know how the theories can be applied to

practical situation. As a student of MBA, it is part of study for
everyone to undergo RESEARCH at some good institute or
organization. So, for this purpose, I got the opportunity of
understanding the merchant banking in India.

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 DECLARATION

I under signed AYUSHI TYAGI, student of RD ENGINEERING

COLLEGE DUHAI, GHAZIABAD studying in MBA hereby declare
that the project work represented in this report is my own work and
has been created by me under the supervision of our guide and lecturer
Pankaj Pandey of RD ENGINEERING COLLEGE.
This report has not been submitted to any other University for any
examination.

DATE: SIGNATURE

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TOPIC PAGE No.
Merchant Banking in India 6
Introduction 7
Features of Merchant Banking 9
Modern Merchant Banking 10
Who are Merchant Bankers 11
Functions of the Merchant Banking 12
History of MB 14
Reasons for growth in MB 15
Services of MB 16
Org. that offers MB 18
Classification in MB 20
Regulations for MB in India 21
Difference Between MB & Commercial 23
Banking
Findings 24
Questionnaire 25
References 26

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 Merchant Banking in India
What is Merchant Banking in India?
It is an institution that offers consultancy to its customers regarding
financial, managerial, marketing, and legal concerns. They usually
offer assistance to business loans for big companies, international
finance, and underwriting.

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 INTRODUCTION

A Merchant Bank is a British term for a bank providing various

financial services such as accepting bills arising out of trade,
providing advice on acquisitions, mergers, foreign exchange,
underwriting new issues, and portfolio management

A Merchant Bank can be generally described as a financial services

company with a private equity investment arm offering investment
banking and ancillary services as well. Because a merchant bank acts
not only as an advisor and broker but also as a principal, a merchant
bank has a longer-term approach than a typical investment bank and is
highly concerned with the viability of each investment opportunity
and providing the right advice for a strong partnership with each client
company.

In banking, a merchant bank is a traditional term for an Investment

Bank. It can also be used to describe the private equity activities of
banking. This article is about the history of banking as developed by
merchants, from the Middle Ages onwards.

Amidst the swift changes sweeping the financial world, Merchant

Banking has emerged as an indispensable financial advisory package.
Merchant banking is a service-oriented function that transfers capital
from those who own to those who can use it. They try to identify the
needs of the investors & corporate sector & advice entrepreneurs what
to do to be successful.

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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 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 source 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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Features of Merchant Banking
Here are some of the must-know characteristics
of merchant banking in India-

▪ High ratio of decision-makers as a percentage of

the complete staff
▪ Loose organizational structure
▪ Fast decision mechanism.
▪ Refined services on both national and international
levels.
▪ Huge amount of information.
▪ Profound contact with the environment.
▪ Priority on fee and commission returns.
▪ Innovative instead of monotonous operations
▪ Elevated liquidity ratio
▪ Consolidation of short and medium-term
engagements
▪ Low ratio of profit allocation.

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MODERN MERCHANT BANKING
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, create or expands a need -- and fulfil capital
requirements. The modern European merchant bank, in many ways,
reflects the early activities and breadth of services of the colonial
trading companies.

Most companies that come to a U.S. merchant bank are looking to

increase their financial stability or satisfy a particular, immediate
capital need.

Professional merchant bankers must have:

1) an understanding of the product, its industry and operational
management.
2) an ability to raise capital which might or might not be one's own
(originally merchant bankers supplied their own capital and thereby
took an equity interest in the transaction).
3) and most importantly, effective skills in concluding a transaction
the actual sale of the product and the collection of profit.

Some people might question whether or not there are many

individuals or organizations that have the abilities to fulfil all three
areas of expertise.

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Who Are Merchant Bankers?

• Merchant banks are private financial institution.

• Their primary sources of income are PIPE (Private Investment in
Public Entities) financings and international trade.
• Their secondary income sources are consulting, Mergers &
Acquisitions help and financial market speculation.
• Because they do not invest against collateral, they take far
greater risks than traditional banks.
• Because they are private, do not take money from the public and
are international in scope, they are not regulated.
• Anyone considering dealing with any merchant bank should
investigate the bank and its managers before seeking their help.
• The reason that businesses should develop a working
relationship with a merchant bank is that they have more money
than venture capitalists. Their advice tends to be more pragmatic
than venture capitalists.

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Functions of Merchant Bankers

There are a lot of functions that merchant banks do; let’s have a look
at some of them:

▪ Help raise funds: The highlighting part about merchant banks is

that they assist their clients in raising funds from the market by
issuing shares, debentures, and bank loans. They help to raise
funds from both domestic and international markets.

▪ Revival of sick units: They support the companies in rebuilding

the disabled manufacturing units. They meet a lot of long-term
financial institutions and the Industrial and Financial Restoration
Council for backing them.

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▪ Handling government permission: Almost all the business
needs the consent of government for commencing a fresh
project. In fact, there are a lot of industries that need permission
for expansion and modernization; hence merchant banks handle
government permissions for their clients.
▪ Advice on various issues: Merchant Banking in India is
relatively different from other countries as here they also offer
advice to their clients on modernization and expansion of
business.
▪ Brokers in the stock exchange: They also serve as a broker in
the stock exchange for their clients, plus they also buy and sell
shares on account of them.
▪ Promotional Activities: They also play the role of industrial
business promoters as well. They enable the developers to build
innovations, make feasibility studies, define ventures, and
receive public bodies and opportunities permits.
▪ Services to private sector units: They provide services to
public sector units by offering numerous services like help in
getting long term capital, foreign collaboration, marketing of
securities, and also manage their long-term finance
▪ Management of interest and dividend: They also guide their
clients in managing both dividends on shares and interest on
debentures. Merchant bank proffers them directions on the rate
of dividend and timing as well.
▪ Money Market operation: They also trade with short-term
money market instruments such as government bonds,
commercial paper issues by big corporate enterprises, treasury
bills issued by RBI, etc.
▪ Managing Public issue of companies
▪ Assistance to small companies
▪ Leasing services
▪ Managing public issue

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History of Merchant Banking
You would be amazed to know that merchant banks were established
back in the 17 and 18 centuries in France and Italy by the Italian grain
merchants. Initially, in merchant banking, a few merchant bankers
were included who were intermediates in financing other transactions
or their own.

After a couple of years, the practice of merchant banking evolved in

the modern era from London. Merchants began to finance foreign
trade by acceptance of the bill. With time they started using other
services such as underwriting the issues, loan syndication, portfolio
management, etc.

Merchant banking in India began in 1967 by National Grind lays;

later, Citi Bank started it in 1970. In the year 1972, SBI became the
first commercial bank to set up a distinct division for merchant
banking. Then it was followed by ICICI in 1973, and then various
banks started these services such as PNB, Bank of India, UCO Bank,
etc.

It was in 1973 when FERA came into existence that helped increase
merchant banking activities in India. After that, various banks such as
IDBI and IFCI entered the market.

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Reasons for growth of Merchant
Banking
There are a few reasons that accelerated the growth of
these banks in India. Some of the reasons are:
1. Globalization: After the 1991 reforms, the Indian economy saw a
drastic change as it opened gates for foreign companies. It helped in
getting funds from abroad; thus, it led to the growth of merchant
banks.

2. Elevated Competition: Because of the globalization of the

economy, the market scenarios became lucrative, and business
options became favourable for various individuals. This pivoted the
Indian corporate sector, and a huge expansion was seen in this sector.
This motivated the Merchant Bankers to play an important role by
offering specialized services to corporate.

3. Switch in consumer trends: There was a huge transformation in

the industrial and corporate sectors because of the foreign players in
the market.

The major benefit was that the Indian massed started getting better
quality products as the Indian companies also started working on
quality to match the foreign products. In such prevailing
environments, financial products and instruments became more
prominent.

4. Government Reforms: Government intervention was reduced, and

privatization was increased. It also raised the limits of investment and
lessened direct interventions that led to an increase in the proposition
of foreign players.

These were some of the causes that hastened the increase

of Merchant Banking in India. Let us also know the services that
merchant banking offers to corporate and big business houses.

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Services of Merchant Banking
1. Portfolio Management: It refers to decreasing the risk and
maximizing the profits. This expression is usually used in connection
to shares and debentures only. Merchant bankers offer these services
to their customers and guide the investors in selecting the right
securities as per their needs. Thus, merchant bankers ensure that they
are updated with the complete market information.

2. Corporate Counselling: This is the basic service that merchant

banks offer as all industrial units, whether new or existing, require
this service. There is a wide range of services that come under
corporate counselling, such as project counselling, capital
restructuring, project management, working capital management,
public issue management, loan syndications, fixed deposit, and lease
financing.

3. Management of Capital Issues: This service comprises

selling securities, equity shares, debentures, preference shares, etc., to
the investors. The role of the merchant banker here is to make an
action plan and budget for expenses for coordinating with
underwriters, the expense for the issues, choosing the advertising
agency for pre and post-issue.

For doing this, they have to be in touch with agencies that are
involved in public issues.

4. Underwriting services: This is one of the most important

services given by merchant banks as in this, the bank gives a
guarantee that states that if the agreement is below the specified level,
then the bank would have to contribute to the stated expense.

5. Loan Syndication: This service is pretty unusual from what the

other banks offer. Here the merchant banks arrange a loan for a
borrower who can be a big company, a government department, or a
local authority. But there are a lot of measures that a merchant banker
has to take before a loan.

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Firstly, they check and analyse the cost of the project, then they
design the capital structure, see how much the promoter is
contributing, and then decides on the amount of loan and approaches
the financial institution for a loan. They also have to ensure that the
company adheres to all the guidelines.

Other services that merchant banks offer are:

▪ Project Counseling
▪ Issue Management
▪ Foreign Currency Financing
▪ Advisory Services to Mergers and Takeovers
▪ Broking Corporate Advisory Services Leasing
▪ Consultancy to Sick Industrial Units
▪ Providing Venture Capital Financing
▪ Act as Debenture Trustee

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Types of the organization that offer
Merchant Banking services
Here are the organizations that provide Merchant banking services in
India:

▪ Commercial Banks and their sub-banks

▪ Foreign Banks comprise Citi Bank, National Grind lays bank,
Hong Kong Bank, etc.
▪ State Level Financial Institutions are State Industrial
Development Corporations (SIDC’s) and State Financial
Corporations.
▪ All India Financial Institutions and Development Banks like
ICICI, IFCI, IDBI, etc.
▪ Private Financial Consultancy Firms and Brokers, like J.M.
Financial and Investment Services Ltd.; Fnam Financial
Consultants, Ceat Financial Services, DSP Financial
Consultants, Kotak Mahindra, etc.
▪ Professional Merchant Banking Houses.
▪ Technical Consultancy Organisations.

Public Sector Merchant Bankers

▪ State Bank of Bikaner and Jaipur

▪ Karur Vysya Bank
▪ SBI Capital markets Ltd.
▪ IFCI Financial Services Ltd.
▪ Punjab National Bank
▪ Bank of Maharashtra
▪

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Private Sector Merchant Bankers

▪ Yes, Bank Ltd.

▪ ICICI Securities Ltd.
▪ Kotak Mahindra Capital Company Ltd.
▪ Axis Bank Ltd.
▪ Tata Capital Markets Ltd.
▪ Reliance Securities Ltd.
▪ Bajaj Capital Ltd.
▪ ICICI Bank Ltd.

Foreign Players in Merchant

Banking

▪ FedEx Securities Ltd.

▪ Goldman Sachs (India) Securities Pvt. Ltd.
▪ DSP Merrill Lynch Ltd.
▪ Deutsche Equities India Private Limited
▪ Morgan Stanley India Company Pvt. Ltd.
▪ Citigroup Global Markets India Pvt. Ltd.
▪ Barclays Securities (India) Pvt. Ltd.
▪ Barclays Bank Plc
▪ Deutsche Bank

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Classification of Merchant Bankers
Merchant bankers have been divided into four categories for registration-

1. Category 1: The role of merchant bankers in this category is to act as a

consultant, advisor, issue manager, portfolio manager, and underwriter.
2. Category 2: Merchant Bankers in this category act as a consultant, advisor,
portfolio manager, and underwriter. They cannot be an issue manager of
their own but can act as co-manager.
3. Category 3: In this category, merchant bankers cannot do activities related
to portfolio management, plus they can neither take issue management of
their own nor act as a co-manager. They can act as a consultant, advisor, and
underwriter.
4. Category 4: If the merchant banker lies in this category, then they can just
act as a consultant or advisor to an issue of capital.

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Regulations for Merchant Banking in
India
SEBI was established in 1992 as a regulatory body for protecting the
interests of investors in the securities market. They made a few rules
and guidelines for merchant bankers so that there is no monopoly, plus
the interest of the customers is not harmed.

They are called Securities Exchange Board of India (SEBI)

Regulations, 1992. These guidelines are amended regularly as per the
dynamic market conditions:

Rules and regulations for merchant banks in India have been

classified into five chapters and four schedules:

1. The first chapter comprises the definitions and meanings of

numerous terms that are frequently used in merchant banking.
2. In the second chapter, you would locate the Registration and
Certification of Merchant Bankers in India. It also holds
several Operational Capabilities and Capital Requirements
required to be finished for registering as a merchant banker.
3. The third chapter deals with the General Obligations and
Responsibilities that the merchant banker would have to
undertake. Some of the major things are the General Code of
Conduct, disclosure of information, auditing of accounts, and
other important operating guidelines.
4. Now comes the fourth chapter, which comprises the right of the
Board to examine the merchant bankers and the actions that can
be taken based on the report.
5. In the fifth chapter, you will find the cases of defaults and the
actions that are taken if anything wrong is done or if the
guidelines are not followed.

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This was about the chapters; the schedule by SEBI comprises of the
format of forms and reports, which are substantial and also states the
fees that are required to be paid for different purposes.

One of the most important things to remember is that no organization

would be able to become a merchant banker until and unless they get
a certificate of registration from SEBI. Plus, he must get himself
registered under these regulations if they want to persevere any of the
merchant banker activities.

For getting the certificate of registration, you would have to apply

through the form and complete two sets of norms, which are:

1. Operational capabilities: As per operational capabilities,

merchant bankers are divided as per their roles.

2. Capital Adequacy Norms: For registration of the different

categories of a merchant banker, SEBI has laid a few norms. Capital
adequacy is calculated by taking capital contributed to the business
plus free reserves.

Capital Adequacy Norms by SEBI:

Category of Merchant Banker Minimum Net Worth
Category 1 Rs. 5 Crore
Category 2 Rs. 50 Lakhs
Category 3 Rs. 20 Lakhs
Category 4 Nil

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Difference Between Merchant Banking & Commercial Banking

Merchant Commercial
Banks Banks

Merchant banks work Commercial banks cater

primarily for corporate to the needs of individual
firms customers.

Commercial banks usually

Merchant Banks are
avert taking any kind of
always open to take risks
risk.

In merchant banks,
Commercial banks are
everyone cannot open an
open for everyone.
account

Merchant banks are Commercial banks are

management-oriented asset-oriented.

Commercial banks usually

buy and sell debt-related
Merchant banks usually
finance such as loan
do business with equities
approvals, credit
proposals, etc.

The major activities done

by merchant bankers are Commercial banks mostly
underwriting, portfolio play the role of financers
management, consultant, only.
and advisor

Merchant banks are more

Commercial banks to the
related to the primary
secondary market.
market

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Significance/Findings of the Study: -

• It would help us to develop the ability to study the functioning of

Merchant Banking in India & learn & apply multidisciplinary
concepts, tools & techniques to solve vital problems.
• It familiarizes with the various services provided by Merchant
Bankers.
• They would help us to draw comparison between public &
private sector companies engaged in Merchant Banking
activities.

Based upon the comparison, it would help us to determine which

sector has more growth potential & where should one invest his/her
funds to maximize the return at minimum risk.
In India Merchant Banking activities started from the year 1967,
following the footsteps of similar activities in UK & USA. 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.

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 QUESTIONNARE

Q1) What is Merchant Banking, for example?

A1) It is an institution that trades in underwriting, business loans for companies,
advice on mergers & acquisitions, and international finance. They also offer
consultancy to its clients in various areas such as marketing, financial, managerial,
etc.

For example, merchant banking renders skill-oriented professional service to their

clients concerning their financial requirements for adequate consideration in the
form of a fee.

Q2) How many Merchant Bankers are there in India?

A2) There are approximately 1450 merchant bankers in India. Out of 1450, around
930 are registered with SEBI.

The major ones which are registered with SEBI are-

In Public Sector– Commercial Banks, Financial Institutions, State Institutions.

In Private Sector– International Bankers, Banks, finance and investment

Q3) Who can be a merchant banker in India?

A3) To become a merchant banker, the applicant needs to pay a fee of Rs.50 000
by demand draft drawn in favour of ‘Securities and Exchange Board of India,’
payable at Mumbai, and this fee is non-refundable.

Secondly, the applicant’s net worth must be at least Rs 5 crore, not less than that.
There is a fee of 20 Lakhs that he needs to pay as per SEBI Regulations, 2014.
This money is to be paid when you get the certificate of initial registration by
SEBI.

A merchant banker needs to hold a valid SEBI registration as per the SEBI
regulations 1992. Then only he becomes eligible for acting as a Book Running
Lead Manager (BRLM) to an issue. After this, the issuer company asks the
merchant banker who is SEBI registered to make the offer document.

Merchant banker needs to ensure that he adheres to the legal compliance while
preparing the offer document.

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 Q4) What are the functions of merchant banking?
A4) There are a lot of things that merchant bankers do for their clients; some of the
services that it offers are-

▪ Management of Debt and Equity offerings

▪ Issue Management
▪ Project Counseling
▪ Financial Structuring
▪ Corporate Counseling and Advisory Services
▪ Placement and Distribution
▪ Portfolio Management
▪ Underwriting of Public Issue
▪ Offering venture capital and mezzanine financing
▪ Off-shore Finance
▪ Loan Syndication
▪ Non-Resident Investment

REFERENCES
✓ Google
✓ Wikipedia
✓ Money Mint
✓ Seminarsonly.com
✓ Magazines
✓ Newspapers
✓ Blogs

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