MERCHANT BANKING

3. A merchant Bank may be defined as
an institution which covers a wide
range of activities such as
underwriting of share, portfolio
management, project counseling,
credit syndication, insurance etc.

4. • The term Merchant Banking originated from London who
started financing foreign trade through acceptance of bills.
• Later they helped the Government of under developed
counties to raise long term funds.
• Later these merchants formed an Association which is now
called “Merchant Banking and Securities House
Association”.

5. • In India, merchant banking services were
started by foreign banks, namely, the National
Grindlays Bank in 1967 and the city bank in
1970.
• The State Bank of India was the first Indian
commercial bank which established a
merchant banking division in 1972.
• Later on ICICI established their merchant
banking division followed by some other bank
like Syndicate Bank, Bank of India, Bank of
Baroda, Chartered Bank, Mercantile Bank,
Canara Bank, PNB, UCO Bank etc.

6. The term merchant bank used in the United Kingdom to
describe investment banks, but has a more narrow focus in
the United States. They may act like investment banks in the
U.S. but tend to focus on services tailored to multinational
corporations and high net worth individuals who do business
in more than one country.
Merchant banks in the U.S. are financial institutions that
deal with international finance for multinational
corporations. Merchant banks traditionally perform
international financing and underwriting including real
estate, trade finance, foreign investment, and other
international transactions. They may be involved in issuing
letters of credit and in the transfer of funds. They may also
consult on trades and trading technology.

7. Let's say Company ABC–based in the United
States—wants to buy Company XYZ in Germany,
it would hire a merchant bank to facilitate the
process. That bank would advise Company ABC
on how to structure the transaction. It may also
help ABC in the financing and underwriting
process.

9. 1.Project Counseling:- It includes preparation of
project reports, deciding upon financing patterns,
appraising the project relating to its technical,
commercial and financial viability. Hence, in general,
the project counseling includes the filling up of
application forms with relevant information for
obtaining funds from financial institution.
2. Loan Syndication:- Assistance is rendered to raise
loans for projects after determining promoter’s
contribution. These loans can be obtained from a single
institution.

10. 3. Issue Management:- Management of issues involves
marketing of corporate securities i.e. equity shares,
preference shares and debentures by offering them to
public.
 Pre-issue activities
 They prepare copies of prospectus and send it to SEBI
and then file them to Registrar of Companies.
 They conduct meetings with company representatives
and advertising agencies to decide upon the date of
opening issue, closing issue, launching publicity
campaign etc.
 They help the companies in fixing up the prices for
their issues.

11.  Post-issue activities
 It includes collection of application forms, screening of
applications, deciding allotment procedure, mailing of
allotment letters, share certificates and refund orders.
4. Portfolio Management:- Portfolio Management refers to
maintaining proper combination of securities in a a manner
that they give maximum return.
Portfolio Management Services
 To Indian Nationals :-
 Sale and Purchase of securities
 Investing and Purchase of securities
 Investing and managing of fixed deposits
 Safe custody of securities in India and overseas.

12.  To Non-Resident Indians:-
• Advice on selection of investment
• Critical evaluation of investment portfolio
• Hold securities in safe custody
• Providing tax counseling and filing tax returns etc.
5. Advisory Service relating to the Mergers
and Takeovers:-
• Merger is a combination of two or more companies in
a single company where one survives and other loses
its existence.
• Takeover is the purchase by one company acquiring
controlling interest in the share capital of another
company.

13. • Merchant Banker acts as a middleman between offeror and
offeree, negotiates mode of payment and gets approval
from government.
6. NRI Investment:- NRI’s has to follow lots of complicated
rules for investing in the shares in India. Merchant Bankers
help them in choosing the shares and offer expert advice
fulfilling government regulations thus mobilising more
resources for corporate sector.
7. Off Shore Finance:- Merchant bankers help their clients
in:-
 Long term foreign currency loan
 Joint venture abroad
 Financing exports and imports
 Foreign collaboration arrangement

14.  Commercial Banks
 Foreign banks like National Grindlays Bank,
Citibank, HSBC bank etc.
 Development banks like ICICI, IFCI, IDBI etc.
 SFC, SIC’s
 Private firms like JM Financial and Investment
service, DSP Financial Consultants, CEAT
financial services, Kotak Mahindra, VMC
Project Technologies, Morgan Stanley, Jardie
Fleming etc.

15. Certificate from SEBI is must. They are of four
types:-
Category I merchant bankers:- Can act as issue
managers
Category II merchant bankers:- Can act only as
co-managers
Category III merchant bankers:- Can act as co-
managers but cannot undertake portfolio
management
Category IV merchant bankers:- Can merely act
as consultant or advisor to issue of capital

16. Capital Adequacy Norms:-
Category I:- Rs. 5 crores
Category II:- Rs. 50 lakhs
Category III:- Rs. 20 lakhs
Category IV:- NIL

17. SEBI’s authorization is a must to act as a merchant
bankers. Authorization criteria include:-
 Professional qualification in finance, law or business
management
 Infrastructure like office space, equipment and
manpower
 Capital adequacy
 Past track of record, experience, general reputation
and fairness in all transactions

18.  Every merchant banker must maintain copies of
balance sheet, Profit & Loss account, statement of
financial position
 Half-yearly unaudited result should be submitted to
SEBI.
 SEBI has been vested with the power to suspend or
cancel the authorization in case of violation of the
guidelines
 Every merchant banker shall appoint a ‘Compliance
Officer’ to monitor compliance of the act
 SEBI has the right to send inspecting authority to
inspect books of accounts, records etc…. of merchant
bankers
 Inspections will be conducted by SEBI to ensure that
provisions of regulations are properly complied.

19. An initial authorization fee, an annual fee and renewal
fee may be collected by SEBI
A lead manager holding a certificate under category I
shall accept a minimum underwriting obligation of 5%
of size of issue or Rs.25 lakhs whichever is less.

20.  Should make all the efforts to protect the interest of
investors.
 Should maintain high standards of integrity, dignity
and fairness in conduct of business
 Should not discriminate among the clients
 Should ensure the prospectus, letter of offer etc.. Is
available to investors at the time of issue
 Should render best possible advice to its clients
 Any penal action taken by SEBI should be informed to
its clients
 Should inform the board about any legal proceesdings
initiated against it

21.  Should abide by the rules of “Securities and Exchange
Board of India Regulations, 2003”
 Should develop its own internal code of conduct for
governing its internal operations
 Should ensure that any person it employs should have
the capacity to be a merchant banker
 It is responsible for the act of its employees and
agents
 Should not create false market