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1. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
Merchant Banking
Module B: Investment Banking

2. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
CAIIB – SUPER NOTES
Corporate Banking: Merchant Banking

3. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
Contents
Coverage:
1. Merchant banking in India
2. Introduction
3. History and origin of Merchant Banking in India
4. Merchant Bank
5. Role of Merchant Banker
6. Organisational Setup of Merchant Bankers in India
7. Main objectives of Merchant Bankers
8. Code of Conduct
9. SEBI Guidelines
10. Services of Merchant Bankers in India
11. Qualities of Merchant Bankers
12. Scope for Merchant Banking in India
13. Important Events
14. Association of Merchant Bankers in India
15. Further Readings

4. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
MERCHANT BANKING IN INDIA
1.

5. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
Merchant banking in India
• A body corporate who carries on any activity related to the
issue management, which consists of preparing prospectus
and other information relating to the issue.
• MBs in India are not allowed to conduct any business other
than that related to securities market
• No official category of investment banking

6. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
INTRODUCTION
2.

7. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
Merchant Banking
• Merchant Bank is a Financial Institution primarily engaged in
offering financial services and advice to corporations and wealthy
individuals on how to use their money
• Also includes private equity activities of banking
• According to notification of the MoF Merchant Banker is “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, advisor or rendering corporate
advisory service in relation to such issue management

8. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
HISTORY AND ORIGIN OF
MERCHANT BANKING IN INDIA
3.

9. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
Merchant Banking in India
• Till 18th century moneylenders, moneychangers, village
merchants(Mahajans) and saucers performed the functions of
banks and merchant banks
• Also issued and discounted Bills of Exchange (Hundis) and bank
drafts
• Gave loans on mutual trust, on mortgage of lands, ornaments and
other property
• Jagat Sheth and Habib & Sons were a couple of Merchant Bankers
of this era

10. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
Merchant Banking in India – Post Independence
• In 1967 RBI issued the first merchant banking license to Grindlays.
• Citibank setup its MB division in 1970
• In 1972 SBI started its MB division
• Commercial Banks and foreign development finance institutions
have organized MBs through formation of division, nationalised
banks have formed subsidiary companies, and share brokers and
consultancies constituted themselves into Public Ltd co. Some have
equity stake of foreign merchant bankers.

11. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
MERCHANT BANK
4.

12. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
Importance and Need
• The developmental activity throughout the country is exerting excess demand
on the sources of funds
• Since the FIs were unable to meet the demand the companies were
constrained to approach Capital Markets
• This enthused the commercial banks, share brokers and financial consulting
firms to enter into the field of MB and share the growing capital markets
• MBs can play a significant role in mobilizing funds of savers to investible
channels assuring reasonable ROIs
• MBs with their skills, updated information and knowledge provide counseling
to corporate units w.r.t. different enactments viz. Companies Act, Income Tax
Act, FEMA and various other corporate laws and regulations

13. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
ROLE OF MERCHANT BANKER
5.

14. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
Role of Merchant Banker
• To think and devise new instruments of financing industrial
projects
• To mobilise public deposits

15. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
ORGANISATIONAL SETUP OF
MERCHANT BANKERS IN INDIA
6.

16. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
Organisational Setup of Merchant Bankers
in India
Institutional
Base
Institutional
Base
• Either an
independent
wing or
subsidiary of a
private/Central
Govt./State
Govt. financial
institution
• Play a role on
lines of govt.
priorities and
policies
Banker BaseBanker Base
• Either an
independent
wing or
subsidiary of a
banking
organisation
• Have brought
professionalism
in the industry
Broker BaseBroker Base
• Qualified and
Professionally
skilled brokers
Private BasePrivate Base
• Origins in the
private sector
• Either sole
proprietorship
or public
limited
companies

17. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
Requirements for setting up a MB Outfit
Formation of the Business OrganisationFormation of the Business Organisation
Adoption of a viable business planAdoption of a viable business plan
Registration of Merchant BankerRegistration of Merchant Banker
Application for grant of certificate
Application to conform to the
requirements
Furnishing of information,
clarification and personal
representation
Consideration of application
Grant of Certificate
Payment of fees

18. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
MAIN OBJECTIVES OF MERCHANT
BANKERS
7.

19. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
Main objectives of Merchant Bankers
To carry on the
business of
Merchant Banking
To carry on the
business of
Merchant Banking
To create
secondary market
for bills and act as
acceptance house
To create
secondary market
for bills and act as
acceptance house
Setup and provide
services for
venture capital
technology funds
Setup and provide
services for
venture capital
technology funds
To provide services
to Housing Finance
Schemes
To provide services
to Housing Finance
Schemes
To render services
like a For Ex dealer
To render services
like a For Ex dealer
Buying and selling,
hypothecating and
dealing with assets
and stock
Buying and selling,
hypothecating and
dealing with assets
and stock

20. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
Obligations and Responsibilities
• Should maintain proper books of accounts, records and submit half yearly/annual
financial statements to SEBI within stipulated period of time
• Should not associate with a MB not registered with SEBI
• Should not enter into any transaction on the basis of unpublished information available
to them
• Must submit himself and his records to inspection by SEBI
• Must disclose information to SEBI as and when called for
• Must abide by the code of conduct prescribed for them
• Every MB acting as lead manager must enter into an agreement with the issuer setting
out mutual rights, liabilities, obligations, relating to such issues with particular
reference to disclosures allotment, refund etc

21. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
CODE OF CONDUCT
8.

22. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
Code of Conduct
• The merchant banker must observe high integrity and fairness in all his dealings
• He shall render at all times high standards of services, exercise due diligence,
exercise independent professional judgement
• Must disclose to his clients the possible source of conflict of duties and interests
• Should not indulge in unfair practice or unfair competition with other merchant
bankers
• Should not make any exaggerated statement about his capacity or achievement
• Should endeavor to give best possible advice
• Should maintain secrecy of all confidential information
• Should not engage in creation of a false market or price rigging or manipulation

23. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
SEBI GUIDELINES
9.

24. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
SEBI Guidelines
• SECURITIES AND EXCHANGE BOARD OF INDIA (DISCLOSURE
AND INVESTOR PROTECTION) GUIDELINES, 2000
http://www.sebi.gov.in/cms/sebi_data/attachdocs/12897965
70043.pdf

25. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
Investment Banks vs. Merchant Banks
Investment BanksInvestment Banks
Origin in capital market activitiesOrigin in capital market activities
Traditionally, facilitated M&A through
share sales and provided research and
financial consulting to companies
Traditionally, facilitated M&A through
share sales and provided research and
financial consulting to companies
Now, primarily perform Capital Market
related activities for large customers
Now, primarily perform Capital Market
related activities for large customers
Merchant BanksMerchant Banks
Origin in Trade Finance activitiesOrigin in Trade Finance activities
Traditionally, performed international
financing activities such as Foreign
Corporate/Real Estate investments, Trade
Finance, Transactions etc.
Traditionally, performed international
financing activities such as Foreign
Corporate/Real Estate investments, Trade
Finance, Transactions etc.
Now, primarily perform financing
activities for companies which have
outgrown VCF needs
Now, primarily perform financing
activities for companies which have
outgrown VCF needs

26. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
Merchant Banks vs. Commercial Banks
Merchant BanksMerchant Banks
• Assist in raising capital in the
form of equity, preference
shares, syndicated loan and WC
instruments
• Advisor not financer
• Do not accept chequeable
deposits
• Mainly fee based services
• Closer to customers
• Undertake work related to
management of equity issues
Commercial BanksCommercial Banks
• Provide funds in the form of
term loan and WC
• Financing is the main business
• Chequeable deposits are a key
feature
• Both fund and fee based
services
• Not very close to the customers.
There may be information
asymmetry
• Majority business is about term
lending and bank deposits

27. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
SERVICES OF MERCHANT BANKERS
IN INDIA
10.

28. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
Services of Merchant Bankers in India
Business Planning StageBusiness Planning Stage
• Project Feasibility Study
• Advice on Capital Structuring
Equity RaisingEquity Raising
• Preparation of Prospectus and liaison with SEBI
• Pricing Decisions
• Marketing in the capacity of lead managers
• Underwriting the issue
• Post issue Management
• Assistance in ADR/GDR
Debt RaisingDebt Raising
• Management of Debenture Issue
• Preparation of bankable proposal and syndication of loan
Working Capital RaisingWorking Capital Raising
• Assistance in arranging optimal working capital finance
Strategic AdviceStrategic Advice
• Advice on mergers and acquisitions
• Corporate Structuring Advice

29. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
Services of Merchant Bankers in India
Corporate
Counselling
Corporate
Counselling
Project Counselling
and Pre-Investment
studies
Project Counselling
and Pre-Investment
studies
Credit syndication
and project finance
Credit syndication
and project finance
Issue ManagementIssue Management
UnderwritingUnderwriting Bankers to the IssueBankers to the Issue
Portfolio
Management
Portfolio
Management
Venture Capital
Financing
Venture Capital
Financing
LeasingLeasing
Non-Resident
Investment
Counseling and
Management
Non-Resident
Investment
Counseling and
Management
Acceptance Credit
and Bill Discounting
Acceptance Credit
and Bill Discounting
Advising on
Mergers,
Amalgamations and
take-over
Advising on
Mergers,
Amalgamations and
take-over
Arranging Off Shore
Finance
Arranging Off Shore
Finance
Fixed Deposit
Broking
Fixed Deposit
Broking
Relief to Sick
Industries
Relief to Sick
Industries

30. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
QUALITIES OF MERCHANT BANKERS
11.

31. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
Qualities of Merchant Bankers
KnowledgeKnowledge
Capital
Market
Familiarity
Capital
Market
Familiarity
Liaising AbilityLiaising Ability
InnovationInnovation IntegrityIntegrity

32. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
Problems and Hurdles
Industry
Compartmentalization
Industry
Compartmentalization
Malafide PracticesMalafide Practices RegulationsRegulations

33. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
SCOPE FOR MERCHANT BANKING IN
INDIA
12.

34. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
Scope for Merchant Banking in India
India, a growing market,
provides opportunities
to MBs
India, a growing market,
provides opportunities
to MBs
Increased liberalization
has increased their
scope
Increased liberalization
has increased their
scope
Banking policies restrict
scope of commercial
banks giving merchant
banks more space
Banking policies restrict
scope of commercial
banks giving merchant
banks more space
Indian corporates prefer
MBs doing the work for
them instead of doing it
in-house
Indian corporates prefer
MBs doing the work for
them instead of doing it
in-house
Increased corporate
dynamics has increased
the scope for MBs
Increased corporate
dynamics has increased
the scope for MBs

35. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
IMPORTANT EVENTS
13.

36. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
Important Events
• JV between Morgan Stanley and JM Financial inked in 1997
• PNB aims profit of Rs. 7500 Crore by 2013
• ICICI bank to oversee M&As – deal signed with ICICI securities
• Birla Capital and Financial Services gets SEBI merchant
banking licence
• Nomura launches its investment banking operations in India

37. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
ASSOCIATION OF MERCHANT
BANKERS IN INDIA (AMBI)
14.

38. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
Association of Merchant Bankers in India
• A professional non-profit company setup to represent the
industry
• Expected to set code of ethics and facilitate dialogue between
the industry and regulatory bodies
• Dormant at present due to lack of support from the members
and non-initiative from SEBI/government
• AMBI Website: http://www.ambi.org.in/default.asp

39. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
FURTHER READINGS
15.

40. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
Further Readings
• http://www.sebi.gov.in/acts/Merchantbankers.pdf

41. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
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Just mark an email to super.msahluwalia@yahoo.com

42. CAIIB – Super-Notes© M S Ahluwalia Sirf Business
For more Super-Notes: Click Here
M S Ahluwalia, amongst other things, is a visual artist, blogger,
blog designer and of course an MBA and Banker from New
Delhi, India.
To know more about him you may visit his blog-site: Estudiante De La Vida