28076595 Merchant Banking in India

Merchant Banking in India

MERCHANT BANKING IN INDIA INTRODUCTION Financial services are an important component of financial system. The smooth functioning of financial system depends upon the range of financial services extended by the providers. Financial services in India have witnessed remarkable changes in the recent past after the implementation of “Liberalization, privatization and globalization”. Funds are tapped from the capital market to finance various mega industrial projects. In attracting public savings, merchant bankers play a vital role as specialized agencies. The resources raising functions remains to be the primary business of a merchant banker. The primary market holds the key to rapid capital formation, growth in industrial productions and exports. There has to be accountability to the end use of funds raised from the market. The increase in the number of issues and amount raised the number of merchant bankers. Therefore, the field became highly competitive market where it requires a specialized skill in handling the situation. The merchant bankers have a social responsibility to in building an industrial structure in India.

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Merchant Banking in India

Merchant bankers assist corporate in raising capital. They assist in issue of Shares, syndicating loans, public issue of debentures. They do not provide funds. They only assist. They also actively arrange working capital, appraisal Projects scrutinize & persuade merger proposals. In BRITAIN merchant bankers & investment bankers are synonymous. In the U.S., Merchant bank means as investment bank which is wellequipped to handle multinational corporations. In INDIA merchant bankers is a body corporate who carries on any activity of the issue management, which consist of preparing prospectus & other information relating to the issue. Merchant banks in India are not allowed to conduct any business other than that related to securities market. There is no official category in investment banking.

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Merchant Banking in India

DEFINITION: In banking, a 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. The term can also be used to describe the private equity activities of banking. According to Cox, D. merchant banking is defined as, “merchant banks are the financial institutions providing specialist services which generally include the acceptance of bills of exchange, corporate finance, portfolio management and other banking services”. The Notification of the Ministry of Finance defines a merchant banker as, “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”. In short, merchant bankers assist in raising capital and advice on related issues.

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Merchant Banking in India

History and Origin of Merchant Banking In India ORIGIN Merchant banking originated through the entering of London merchants in foreign trade through acceptance of bill. Later, the merchants assisted the Government of under developed countries in raising long – terms through floatation of bonds in London money market. Over a period they extended their activities to domestic business of syndication of long term and short term finance, underwriting of new issues, acting as registrars and share transfer agents, debenture trustees, portfolio managers, negotiating agents for mergers, takeovers etc. Merchant Banking in India – Historical Perspective: Till 18th century moneylenders, moneychangers, village merchants (maharanis), & saucers performed the function of banks & merchant banks. They also issued & discounted bills of exchange (handiest) & bank draft. They gave loans on mutual trust, on mortgage of lands, ornaments & other property. JAGAT SHETH (1720-1773AD, BENGAL) HABIB & SONS which is now HABIB BANK (founded in 1941, now is in PAKISTAN). These were the organized merchant bankers in recent history of INDIA. Merchant Banking is an activity that includes corporate finance activities, such as advice on complex financings, merger and acquisition advice (international or domestic), and at times direct equity investments

in

corporations

4

by

the

banks.

Merchant Banking in India

Merchant banks are private financial institution. Their primary sources of income are PIPE 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. It is rare for a merchant bank to fail. The last major failure was Barings Bank (1992). It failed because of unsupervised trading of copper futures contracts and buybacks. When the Dot Com Bubble burst in 2001, scores of venture capital firms failed. The greatest merchant bank failure in history was the Knights Templar. After the Crusades, the Order became immensely wealthy controlling and funding the trade between the Middle East and Western Europe. They foolishly loaned money to the French Government. To avoid repaying the money, King Louie had the Pope declare the Order heretics. Thousands of monks lost their lives, but France balanced its budget. To understand Merchant Banks, you should know something of their history. Modern merchant banking started in Italy during the 7th Century. The 5

Merchant Banking in India

banking practices evolved from the financing structure of the Silk Road Trading that predates the Roman Empire. The basic financing structure was the advance payment for goods by merchant bankers at a great discount to the delivery value of those goods. In the case of Italy and then Germany, wheat was the product. The merchant banks purchased the wheat soon after planting. They accepted the risk of crop failure. They profited when they sold the wheat. In most countries today, the national government accepts the risk through government crop insurance. As the British Empire expanded in the 18th and 19th Centuries, merchant banks prospered in London. For instance, merchant bankers funded Canada’s Hudson Bay Company. This period saw the rise of such merchant banks as Schroders, Warburgs or Rothschilds. Amsterdam benefited from the trade created by the Dutch East Indian Company. Since the 18th century, the role of the merchant banker has been considerably broadened to include a composite of modern day skills. Such skills are inherently entrepreneurial, managerial,

financial

and

transactional.

Today, North American merchant banks have taken the form of "boutiques"whereby, each offers its own specialized services. The hallmarks of these merchant bank boutiques are that they typically charge fees payable in cash and/or the client's stock for each service rendered. You can find a merchant bank that meets any reasonable set of needs.

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Merchant Banking in India

Merchant Banking in India – Post Independence: In 1967, RBI issued its first merchant banking license to grind lays started with management of capital issues, production planning, system design and also market research. It provides management consulting services as well. Citibank setup its merchant banking division in 1970. its scope includes assisting new entrepreneur, evaluating new projects, raising funds through borrowing and issuing equity. Indian banks started banking services as a part of multiple services they offered to clients from 1972. State bank of India started the merchant banking division in 1972. In the initial years the objective was to render corporate advice and assistance to small and medium entrepreneurs. Merchant banking activities are organized and undertaken in several forms. Commercial banks and foreign development finance institutions have organized them through formation of division; nationalized banks have formed subsidiaries companies and share brokers and consultancies constituted themselves into public ltd. Co. or registered themselves as private ltd. companies. Some of them have equity stake of foreign merchant bankers.

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Merchant Banking in India

Merchant Bank A merchant bank deals with the commercial banking needs of international finance, long term company loans, and stock underwriting. A merchant bank does not have retail offices where one can go and open a savings or checking account. A merchant bank is sometimes said to be a wholesale bank, or in the business of wholesale banking. This is because merchant banks tend to deal primarily with other merchant banks and other large financial institutions. The most familiar role of the merchant bank is stock underwriting. A large company that wishes to raise money from investors through the stock market can hire a merchant bank to implement and underwrite the process. The merchant bank determines the number of stocks to be issued, the price at which the stock will be issued, and the timing of the release of this new stock. The merchant bank files all the paperwork required with the various market authorities, and is also frequently responsible for marketing the new stock, though this may be a joint effort with the company and managed by the merchant bank. For really large stock offerings, several merchant banks may work together, with one being the lead underwriter.

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Merchant Banking in India

By limiting their scope to the needs of large companies, merchant banks can focus their knowledge and be of specific use to such clients. Some merchant banks specialize in a single area, such as underwriting or international finance.

Many of the largest banks have both a retail division and a merchant bank division. The divisions are generally very separate entities, as there is very little similarity between retail banking and what goes on in a merchant bank.

Although your life is probably affected every day in some way by decisions made in a merchant bank, most people reading this article are unlikely ever to visit or deal directly with a merchant bank. Merchant banks operate behind the scenes and away from the spotlight.

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Merchant Banking in India

Importance and Need of merchant banking Important reason for the growth of merchant banking has been developmental activity throughout the country, exerting excess demand on the sources of funds for ever expanding industry and trade, thus, leaving a widening

gap

under

bridged between the

supply

and

demand

of

inventible funds. All Indian financial institutions and experienced resources constraint to meet the ever increasing demands for funds from the corporate sector enterprises. In the circumstances corporate sector had the only alternative to avail of the capital market services for meeting their long-term financial requirements through capital issues of equity and debentures. With the growing demand for funds there was pressure on capital market that enthused the commercial banks, share brokers and financial consultant firms to enter into the field of merchant banking and share the growing capital markets. With the result, all the commercial banks in nationalized and public sector as well as in private sector including the foreign banks in India have opened their merchant banking windows and are competing in this field. There has been a mushroom growth of financial consultancy firms and broker firms doing advisory functions as well as managing public issues in syndication with other merchant bankers. Notwithstanding the above facts, the need of merchant banking institutions is felt in the wake of huge public savings lying still untapped. Merchant banks can play highly significant role in mobilizing funds of savers to investible channels assuring promising return on investments and thus can

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Merchant Banking in India

help in meeting the widening demand for investible funds for economic activity.

With the growth of merchant banking profession corporate enterprises in both public and private sectors would be able to raise required amount of funds annually from the capital market to meet the growing requirements for funds

for

establishing

new

enterprises,

undertaking

expansion/modernization/diversification of the existing enterprises. This reinforces the need for a vigorous role to be played by merchant banks. Merchant banks have been procuring impressive support from capital market for the corporate sector for financing their projects. This is evidenced from the increasing amount raised form the capital market by the corporate enterprises year after year. In view of multitude of enactments, rules and regulations, guidelines and offshoot press release instructions brought out by the government from time to time imposing statutory obligations upon the corporate sector to comply with all those requirements prescribed therein, the need of skilled agency existed which could provide counseling in these matters in a package form. Merchant bankers, with their skills, updated information and knowledge, provide this service to the corporate units and advise them on such requirements to be complied with for raising funds from the capital market under different enactments viz. Companies Act, Income-tax Act, Foreign Exchange Regulation Act, Securities Contracts (Regulation) Act and various other corporate laws and regulations. Merchant bankers advise the investors of the incentives available in the form of tax relief’s, other statutory

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Merchant Banking in India

relaxations, good return on investment and capital appreciation in such investment to motivate them to invest their savings in securities of the corporate sector.

Role of Merchant Banker The role of merchant banker is dynamic in the wake of diverse nature of merchant banking services. Merchant banker’s dynamism lies in promptly attending to the corporate problems and suggest ways and means to solve it. The nature of merchant banking services is development oriented and promotional to help the industry and trade to grow and survive. Merchant banker is, therefore, dedicated to achieve this objective through his dynamism. He is always awake to renew his skills, develop expertise in new areas so as to equip himself with the knowledge and techniques to deal with emerging new problems of corporate business world. He has to keep pace with the changing environment where government rules, regulations and politics affecting business conditions frequently change; where science and technology create new innovations in production processes of industries envisaging immediate renovations, diversifications, modernizations or replacements of existing plant and machinery or other equipments putting new demands for finances and necessitating overhauling of the capital structure of the firms. Merchant banker has to think and devise new instruments of financing industrial projects. He has to assume wider responsibilities of saving industrial units from going sick and guiding industries to be setup in industrially backward areas to eliminate regional imbalances in industrial development of the country.

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Merchant Banking in India

He has to guide the wider section of the community possessing surplus money to invest in corporate securities and other productive investment channels. He has to help the industry in different forms to ensure that it runs risk free and devoid of uncertainty by assisting the promoters with his knowledge and skills to resolve the problems being faced by them. He has to watch the interest and win over the confidence of the government, its agencies, along with the entrepreneurs, the investors and the whole community. He must bridge the communication gap between different sections and resolve the problem being faced in different areas concerned with the business world. To discharge the above role, a merchant banker has to be dynamic. In the days ahead, merchant bankers have very significant role to play tuning their activities to the requirements of the growth pattern of the corporate sector, the industry and the economy as a whole which is, in it, a challenging task and to meet these challenges merchant bankers will have to be more vigorous and strategic in playing their role. They will have also to adopt new ways and means in discharging their role.

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Merchant Banking in India

The growth of Merchant banking in India Formal merchant activity in India was originated in 1969 with the merchant banking division setup by the Grindlays Bank, the largest foreign bank in the country. The main service offered at that time to the corporate enterprises by the merchant banks included the management of public issues and some aspects of financial consultancy. Following Grindlays Bank, Citibank set up its merchant banking division in 1970.The division took up the task of assisting new entrepreneurs and existing units in the evaluation of new projects and raising funds through borrowing and equity issues. Management consultancy services were also offered. Merchant bankers are permitted to carry on activities of primary dealers in government securities. Consequent to the recommendations of Banking Commission in 1972, that Indian banks should offer merchant banking services as part of the multiple services they could provide their clients, State Bank of India started the Merchant Banking Division in 1972. In the initial years the SBI’s objective was to render corporate advice and assistance to small and medium entrepreneurs. The commercial banks that followed State Bank of India were Central Bank of India, Bank of India and Syndicate Bank in 1977.Bank of Baroda, Standard Chartered Bank and Mercantile Bank in 1978 and United Bank of India, United Commercial Bank, Punjab National Bank, Canara Bank and

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Merchant Banking in India

Indian Overseas Bank in late ‘70s and early ‘80s. Among the development banks, ICICI started merchant banking activities in 1973 followed by IFCI (1986) and IDBI (1991).

Organizational setup of merchant bankers in India In India a common organizational setup of merchant bankers to operate is in the form of divisions of Indian and foreign banks and financial institutions, subsidiary companies established by bankers like SBI, Canara Bank, Punjab National Bank, Bank of India, etc. Some firms are also organized by financial and technical consultants and professionals. Securities and Exchange Board of India has divided the merchant bankers into four categories based on their capital adequacy. Each category is authorized to perform certain functions. From the point of organizational setup India’s merchant banking organizations can be categorized into four groups on the basis of their linkage with parent activity. They are: (A) Institutional Base Where merchant banks function as an independent wing or as subsidiary of various

private/Central

Governments/State

Governments

financial

institutions. Most of the financial institutions in India are in public sector and therefore such setup plays a role on the lines of government priorities and policies. (B) Banker Base

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Merchant Banking in India

These merchant bankers function as division/subsidiary of banking organization. The parent banks are either nationalized commercial bank or the foreign banks operating in India. These organizations have brought

professionalism in merchant banking sector and they help their parent organization to make a presence in capital market. (C) Broker Base In the recent past there has been an inflow of qualified and professionally skilled brokers in various stock exchanges of India. These brokers undertake merchant banking related operations also like providing investment and portfolio management services. (D) Private Base These merchant banking firms are originated in private sector. These organizations are the outcome of opportunities and scope in merchant banking business and they are providing skill-oriented specialized services to their clients. Some foreign merchant bankers are also entering either independently or through some collaboration with their Indian counterparts. Private sector merchant banking firms have come up either as the sole proprietorship or public limited companies. Many of these firms were in existence for quite some times before they added a new activity in the form of merchant banking services by opening new divisions on the lines of commercial banks and All India Financial Institutions.

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Merchant Banking in India

Requirements for setting up a merchant banking outfit 1. Formation of the Business Organization SEBI act, 1992 does not prescribe any specific form of business organization to carry on the activities as merchant banker. However, the types of organizations are listed below: a. Sole proprietorship b. Partnership firm c. Hindu Undivided Family (HUF) d. Corporate Enterprises e. Co-operative Society Generally it is preferred that the Merchant Banking outfit be a registered company. Merchant Banks are generally setup as subsidiary companies of banks (Public or Private). For example, SBI caps, ICICI Securities etc. 2. Adoption of a viable business plan All the basic tests required to find out whether the business to be undertaken is viable or not are also applicable to a Merchant Banking setup. Capital adequacy, profitability, growth opportunities and current market size are some of the factors which need to be looked into.

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Merchant Banking in India

3. Registration of Merchant Bankers a. Application for grant of certificate An application for grant of a certificate needs to be made to SEBI . The application can be made for any one of the following categories of the merchant banker namely:•

Category I, that is –

(i) to carry on any activity of the issue management, which will inter-alia consist of preparation of prospectus and other information relating to the issue, determining financial structure, tie-up of financiers and final allotment and refund of the subscription; and (ii) to act as adviser, consultant, manager, underwriter, portfolio manager. •

Category II, that is, to act as adviser, consultant, co- manager, underwriter, portfolio manager;

•

Category III, that is to act as underwriter, adviser, consultant to an issue;

•

Category IV, that is to act only as adviser or consultant to an issue.

To carry on the activity as underwriter or portfolio manager a separate certificate of registration needs to be obtained from SEBI.

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Merchant Banking in India

b. Application to conform to the requirements The application should conform to all the requirements under the SEBI guidelines, otherwise it may be rejected. c. Furnishing

of

information,

clarification

and

personal

representation The Board may require the applicant to furnish further information or clarification regarding matters relevant to the activity of a merchant banker for the purpose of disposal of the application. The applicant or its principal officer may appear before the Board for personal representation. d. Consideration of application The Board shall take into account for considering the grant of a certificate, all matters, which are relevant to the activities relating to merchant banker and in particular the applicant complies with the following requirements, namely: •

the applicant shall be a body corporate other than a non- banking financial company

•

the merchant banker who has been granted registration by the Reserve Bank of India to act as a Primary or Satellite dealer may carry on such activity subject to the condition that it shall not accept or hold public deposit

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Merchant Banking in India •

the applicant has the necessary infrastructure like adequate office space, equipments, and manpower to effectively discharge his activities

•

the applicant has in his employment minimum of two persons who have the experience to conduct the business of the merchant banker

•

a person directly or indirectly connected with the applicant has not been granted registration by the Board;

•

the applicant fulfils the capital adequacy requirement is as follows:

The capital adequacy requirement should not be less than the net worth of the person making the application for grant of registration. The networth shall be as follows, Category Category I Category II Category III Category IV •

Minimum Amount Rs. 5, 00, 00, 000 Rs. 50, 00, 000 Rs. 20, 00, 000 Nil

the applicant, his partner, director or principal officer is not involved in any litigation connected with the securities market which has an adverse bearing on the business of the applicant and have not at any time been convicted for any offence involving moral turpitude or has been found guilty of any economic offence

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Merchant Banking in India •

the applicant has the professional qualification from an institution recognised by the Government in finance, law or business management

•

grant of certificate to the applicant is in the interest of investors.

e. Procedure for Registration The Board on being satisfied that the applicant is eligible shall grant a certificate. On the grant of a certificate the applicant shall be liable to pay the fees as prescribed. f. Payment of fees and the consequences of failure to pay fees Every applicant eligible for grant of a certificate shall pay such fees in such manner and within the period specified. Where a merchant banker fails to pay the Annual fees as provided in Schedule II, the Board may suspend the registration certificate, whereupon the merchant banker shall cease to carry on any activity as a merchant banker for the period during which the suspension subsists. The Merchant Bank can commence business on acquisition of a Certificate of Registration from the SEBI after completion of the above mentioned formalities.

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Merchant Banking in India

Main Objectives Of Merchant Bankers Merchant bankers render their specialized assistance in achieving the main objectives which are presented below: 1. To carry on the business of merchant banking, assist in the capital formation, manage advice, underwrite, provide standby assistance, securities and all kinds of investments issued, to be issued or guaranteed by any company, corporation, society, firm, trust person, government, municipality, civil body, public authority established in India. 2. The main object of merchant banker is to create secondary market for bills and discount or re-discount bills and acts as an acceptance house. 3. Merchant banker’s another objective is to set up and provide services for the venture capital technology funds. 4. They also provide services to the finance housing schemes for the construction of houses and buying of land.

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Merchant Banking in India

5. They render the services like foreign exchange dealer, money exchange, and authorized dealer and to buy and sell foreign exchange in all lawful ways in compliance with the relevant laws of India. 6. They will invest in buying and selling of transfers, hypothecate and deal with dispose of shares, stocks, debentures, securities and properties of any other company.

Obligations and Responsibilites Merchant bankers have the following obligations and responsibilities. 1. Merchant banker should maintain proper books of accounts, records and submit half yearly/annual financial statements to the SEBI within stipulated period of time. 2. No merchant banker should associate with another merchant banker who is not registered in SEBI. 3. Merchant bankers should not enter into any transactions on the basis of unpublished information available to them in the course of their professional assignment. 4. Every merchant banker must submit himself to the inspection by SEBI when required for and submit all the records.

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Merchant Banking in India

5. Every merchant banker must disclose information to the SEBI when it requires any information from them. 6. All merchant bankers must abide by the code of conduct prescribed for them. 7. Every merchant banker who acts 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.

Code of Conduct According to the 13 Regulation of the SEBI of 1992 (Merchant bankers), every merchant banker should comply with following codes of conduct. They are: a) The merchant banker must observe high integrity and fairness in all his dealings. b) He shall render at all times high standard of services, exercise due diligence, exercise independent professional judgement. c) If necessary, he must disclose to his clients the possible source of conflict of duties and interests.

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Merchant Banking in India

d) The merchant banker should not indulge in unfair practice or unfair competition with other merchant bankers. e) He should not make any exaggerated statement about his capacity or achievement. f) He should always Endeavour to give the best possible advise and prompt efficient and cost effective service. g) He should maintain the secrecy of all the confidential information received during the course of service to his client. h) He should not engage in the creation of a false market or price rigging or manipulation.

Guidelines of SEBI After the obligations of the CCI, the place was occupied by a legal organ called as “Securities and Exchange Board of India”. The issue of capital and pricing of issues by companies has become free of prior approval. The SEBI has issued guidelines for the issue of capital by the companies. The guidelines broadly covers the requirement of the first issue by a new or the first issue of a new company set up by the existing company, the first issue by the existing private companies and public issues by the existing listing companies. The SEBI is the most powerful organization to control and lead both the primary market and secondary market. 25

Merchant Banking in India

The SEBI has announced the new guidelines for the disclosures by the Companies leading to the investor protection. They are presented below: a) If any Company’s other income exceeds 10 per cent of the total income, the details should be disclosed. b) The Company should disclose any adverse situation which affects the operations of the Company and occurs within one year prior to the date filing of the offer document with the Registrar of Companies or Stock Exchange. c) The Company should also disclose the information regarding the capacity utilization of the plant for the last 3 years. d) The Promoters of the Company must maintain their holding at least at 20 per cent of the expanded capital.

e) The minimum application money payable should not be less than 25 per cent of the issue price. f) The company should disclose the time normally taken for the disposal of various types of investor’s grievances. g) The Company can make firm allotments in public issues as follows:  Indian mutual funds (20%),  FIIS (24%), 

Regular employees of the company (10%),



Financial institution (20%).

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Merchant Banking in India

h) The Company should disclose the safety net scheme or buy back arrangements of the shares proposed in public issue. This scheme is applicable to a limited number of 500 shares per allottee and the offer should be valid for a period of at least 6 months from the date of dispatch of securities. i) According to the guidelines, in case of the public issues, at least 30 mandatory collection centres should be established. j) According to the SEBI guidelines regarding rights issue, the Company should give advertisements in not less than two newspapers about the dispatch of letters of offer. No preferential allotment may be made along with any rights issue. k) The Company should also disclose about the fee agreed between the lead managers and the Company in the memorandum of understanding.

The Difference between Investment banks and Merchant banks Merchant banks and investment banks, in their purest forms, are different kinds of financial institutions that perform different services. In practice, the fine lines that separate the functions of merchant banks and investment banks tend to blur. Traditional merchant banks often expand into

27

Merchant Banking in India

the field of securities underwriting, while many investment banks participate in trade financing activities. In theory, investment banks and merchant banks perform different functions. Pure investment banks raise funds for businesses and some governments by registering and issuing debt or equity and selling it on a market. Traditionally, investment banks only participated in underwriting and selling securities in large blocks. Investment banks facilitate mergers and acquisitions through share sales and provide research and financial consulting to companies. Traditionally, investment banks did not deal with the general public. Traditional merchant banks primarily perform international financing activities such as foreign corporate investing, foreign real estate investment, trade finance and international transaction facilitation. Some of the activities that a pure merchant bank is involved in may include issuing letters of credit, transferring funds internationally, trade consulting

and co-investment in projects involving trade of one form or another. The current offering of investment banks and merchant banks varies by the institution offering the services, but there are a few characteristics that most companies that offer both investment and merchant banking share. As a general rule, investment banks focus on initial public offerings (IPO’s) 28

Merchant Banking in India

and large public and private share offerings. Merchant banks tend to operate on small-scale companies and offer creative equity financing, bridge financing, mezzanine financing and a number of corporate credit products. While investment banks tend to focus on larger companies, merchant banks offer their services to companies that are too big for venture capital firms to serve properly, but are still too small to make a compelling public share offering on a large exchange. In order to bridge the gap between venture capital and a public offering, larger merchant banks tend to privately place equity with other financial institutions, often taking on large portions of ownership in companies that are believed to have strong growth potential. Merchant banks still offer trade financing products to their clients. Investment banks rarely offer trade financing because most investment banking clients have already outgrown the need for trade financing and the various credit products linked to it.

Merchant banks and Commercial banks

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Merchant Banking in India

Merchant banks

Commercial banks

1) Assist in raising capital in the form of Provide funds in the form of equity, preference shares, and syndicated term loan and working capital. loan working capital instruments. 2) Advisor not financer.

Financing is the main business.

3) Do not accept chequable deposits.

Demand deposits are the key

4) Mainly fees based business.

feature. Mainly fund based business

5) Being advisors, they are closer to the Being lenders, they are more customers and get to know risks of the cautions, assess risks in lending transaction s properly. They work on proposal and cannot afford to be risks shields i.e. mitigation measures

grossly relationship based and close to the customer.

6) Most of work they get is about Commercial

banks

majority

management of equity issues in the business is of terms lending and capacity of lead manager, underwriter, bank deposits. piercing of issue, book running, and liaisoning with SEBI.

Services of Merchant Bankers In India:Merchant bankers provide services as follows:

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Merchant Banking in India

Business planning stage:

1)project feasibility study

Equity raising:

2)advice on capital structuring 3)preparation of prospectus and liaison with SEBI 4)pricing decisions 5)marketing in the capacity of lead managers 6)underwriters to the issue 7)post issue management 8)assistance in ADR/GDR 9)management of debenture issue

Debt raising:

10)preparation of bankable proposal Working capital raising:

and syndication of loan 11)assistance in arranging optimal

Strategic advice:

capital finance 12)advice on

mergers

and

acquisitions 13)corporate structuring advice

SERVICES PROVIDED BY MERCHANT BANKS: (in detail) The development activity through the country had exerted excess demand on the sources of funds by the ever expanding industry and trade which could not be met by the All India Financial Institutions. In these circumstances, the corporate sector enterprises had the only alternative to avail themselves of 31

Merchant Banking in India

the capital market services for meeting the long-term fund requirements through capital issues of equity and debentures. The growing demand for funds from capital market has enthusied many organizations to enter into the field of merchant banking for managing the public issues. The need of merchant banker is also felt in the wake of huge untapped public savings as merchant bankers can play a highly significant role in mobilizing funds from savers to invest in channels assuring promising return on investments and thus narrow down the gap between demand for and supply of investible funds. Merchant bankers not only provide advisory services to corporate enterprises but also advise the investors of the incentives available in the form of tax relief and other statutory obligations. Thus, the merchant bankers help industry and trade to raise funds, and the investors to invest their saved money in sound and healthy concerns with confidence, safety and expectation of higher yields.

Broadly a merchant banker can provide the following services: 1. Corporate Counseling 2. Project Counseling And Pre-Investment Studies 3. Credit Syndication And Project Finance 4. Issue Management

32

Merchant Banking in India

5. Underwriting 6. Bankers 7. Portfolio Management 8. Venture Capital Financing 9. Leasing 10.Non-Resident Investment Counseling And Management 11.Acceptance Credit And Bill Discounting 12.Advising On Mergers, Amalgamations And Take-Over 13.Arranging Offshore Finance 14.Fixed Deposit Broking 15.Relief To Sick Industries

Let’s take a brief look at each of these functions: Corporate Counseling

33

Merchant Banking in India

It includes a whole range of financial services provided by a merchant banker to a corporate unit a view to ensure better performance, maintain steady growth and create a better image among investors. It covers the entire field of merchant banking activities i.e., project counseling, capital restructuring, portfolio management and the full range of financial engineering including venture capital, public issue management, loan syndication, working capital, fixed deposits, lease financing, acceptance credit, etc. However, the scope of corporate counseling is limited to suggestions and opinions leaving to the client to take corrective actions for solving its corporate problems. A merchant banker finds out the problems of enterprise, which shall include organizational goals for the enterprise, size of the organization and operational scales, choice of a product, pricing, etc, and suggests ways and means to solve those problems.

Project Counseling

34

Merchant Banking in India

Project counseling is an important merchant banking service which includes preparation of project reports, deciding upon the financing pattern to finance the cost of the project, appraising the project report with the financial institutions/banks. Project reports are prepared to obtain government approval of the project, for procuring financial assistance from financial institutions and banks, for ensuring market for the proposed product, for planning public issues, etc. Financing the project cost is an important aspect of project counseling. The two sources of funds available to finance the project cost are internal sources of funds (or owners' funds) which includes promoter's contribution and retained earnings; and external sources of funds which refers to the borrowed funds in the form of loans from banks, private investors and financial institutions and in the form of debentures from the public. Merchant banker has to decide the financing mix of the internal and external sources of funds keeping in view the rules, regulations and norms prescribed by the government or followed by the term lending financial institutions. While rendering project counseling services, the merchant banker has to ensure that the application forms for obtaining the funds from financial institutions are filled in with relevant and appropriate information and before submitting the application, the merchant banker has to appraise the project considering the various aspects as to the type of the project, location, technical, commercial and financial viability of the project.

35

Merchant Banking in India

Credit Syndication Once the client company has decided about the project proposed to be undertaken, the next step is looking for the sources wherefrom the funds could be procured to implement the project. Merchant banker has to locate the sources of funds and comply the formalities required to procure the funds. This service rendered by the merchant banker in arranging and procuring credit from financial institutions, banks and other lending and investment organizations for financing the clients' project cost or meeting working capital requirement is referred to as loan syndication or credit syndication. Credit syndication in case of domestic borrowings is with the institutional lenders and banks. Long and medium term funds are obtained from the All India Financial Institutions like IFCI, IDBI etc., state level financial bodies like SFC, SIDC etc., commercial banks, mutual funds etc. Short-term funds are also required by the firm for purchase of raw materials, payment of wages, salaries etc. Sources of financing these short term requirements or working capital needs can be from internal sources like internal accruals from working or operations and short term loans from friends and relatives; or from external sources like short term borrowings from banks etc.

Issue Management and Underwriting

36

Merchant Banking in India

Management of capital issues is a professional service rendered by the skilled and experienced merchant bankers. Previously, the managing agents for a particular corporate used to manage public issues. The abolition of the managing agency system, the growth in the public limited companies in number and size, the imposition of new rules and regulations regarding the public issue of securities made it necessary for merchant bankers to play a definite role in the management of public issues. Public issue management involves marketing of corporate securities by offering the securities to the public, procuring private subscription to the securities and offering securities to existing shareholders of the company. As a manager to the public issue, the merchant banker, before the public issue has to obtain the consent of the stock exchanges to the memorandum and articles of association, appoint other managers, bankers, underwriters, brokers etc. ,advice the company to appoint auditors, solicitors and board of directors, draft the prospectus and obtain consent from the companies legal advisors, board of directors and other concerned parties, file the prospectus with registrar, make an application for enlistment with stock exchanges and finally advertise for the issue. A merchant bankers post issue activities include final allotment and/or refund of subscription amount, calculation of underwriters liability in case of under subscription and complying the necessary statutory requirements for listing of securities on the stock exchange.

Under writing of public issue

37

Merchant Banking in India

A fully underwritten public issue spells confidence to the investing public, which ensures a good response to the issue. Keeping this in view companies, which float a public issue usually, desire a full underwriting of the issue. Underwriting is only the guarantee given by the underwriter that in the event of under subscription, the amount underwritten would be subscribed in proportion by the underwriter. An underwriter of the issue gets the following benefits: •

It earns a commission of the commitment given.

•

It earns the right to be appointed as bankers of that issue.

•

It expands its clientele by underwriting more and more issues.

Bankers to the Issue The merchant banker can automatically become the banker to the issue in the following cases: •

The bank is a broker to the company

•

It has given underwriting commitments.

•

It acts as a manger to the issue

•

The function of a banker to the issue is to accept application forms from the public together with subscription money and transfer them to the account of the controlling branch.

Portfolio Management

38

Merchant Banking in India

Portfolio refers to investment in different types of marketable securities or investment papers like shared, debentures and debenture stocks, bonds etc. from different companies or institutions held by individuals firm or corporate units. Portfolio management refers to managing efficiently the investment in the securities held by professionals to others. Merchant bankers take up management of a portfolio of securities on behalf of their clients, providing special services with a view to ensure maximum return by such investments with a minimum risk of loss of return on the money invested in securities. A merchant banker while performing the services of portfolio management has to enquire of the investment needs of the client, the tax bracket, ability to bare risk, liquidity requirements, etc. they should study the economic environment affecting the capital market, study the securities market and identify blue chip companies in which money can be invested. They should keep record of latest amendment in government guidelines, stock exchange regulations, RBI regulations, etc.

Advisory Services Relating To Mergers and Takeovers

39

Merchant Banking in India

A merger is defined as a combination of two or more companies into a single company where one services and other looses their corporate existence. A merger is also defied as an amalgamation wherein the shareholders of the combining companies become substantially the shareholders of the company formed. A takeover is referred to as an acquisition, which is the purchase, by one company of a controlling interest in the share capital of another existing company. Merchant bankers are the middlemen settling negotiations between the offered and the offeror. Their role is specific and specialized in handling the mergers and taker over assignments. Being a professional expert, the merchant banker is apt to safeguard the interest of the shareholders in both the companies and as such his assistance is useful for both the companies, i.e. the acquirer as well as the acquired company. Based on the purpose of business objective, the search of the acquirer company will start for a merger partner company. If the objective of merger is growth oriented i.e. seeking expansion in production and market segments, utilization of existing companies or optimum utilization of resources, then the acquirer company will select a business related company as a merger partner.

40

Merchant Banking in India

If the objective is diversification in production line or business activities, then it will select a non-related company as a merger partner. Once the merger partner is proposed the merchant banker has to appraise the merger/takeover proposal with respect to financial viability and technical feasibility. He has to negotiate with the parties and decide the purchase consideration and mode of payment. He has to comply with the legal formalities like getting approval from the Government/ RBI; drafting the scheme of amalgamation; getting approval of company Board, financial institution, high court if required; arranging for the meeting etc. Venture Capital Financing Financing an emerging high-risk project is called venture capital financing. Many merchant bankers are entering into this area by also financing viable upcoming projects. The financing is by subscription to the equity capital, while repayment is by selling the equity through stock market when the shares are listed. Leasing Is there another lucrative area of financing where merchant bankers are turning? Leasing is a viable source of financing while acquiring capital assets. The services include arrangement for lease finance facilities for leasing companies, legal; documents and tax consultancy.

41

Merchant Banking in India

Non Resident Investment To attract NRI investments in the primary and secondary markets, the merchant bankers provide investment advisory services to the NRIs in terms of identification of investment opportunities, selection of securities, portfolio management, etc. they also take care of operational details like purchase and sale of securities securing the necessary clearance from RBI under FERA for repatriation of dividends and interest, etc. Acceptance Credit and Bill Discounting Though merchant bankers world over specialize in acceptance credit and bill discounting, these services are not currently provided by merchant bankers in India the principal reasoning being the lack of an active market for commercial bills. Arranging Offshore Finance The merchant bankers also help their clients in the following areas involving foreign currency financing: 1. Financing Of Exports And Imports 2. Long Term Foreign Currency Loans 3. Joint Ventures Abroad 4. Foreign Collaboration Arrangements The assistance rendered as in the case of financial services covers appraisals, negotiations, compliance with procedural and legal aspects etc.

42

Merchant Banking in India

Management of Fixed Deposits of Companies Recently, merchant’s bankers have begun to structure and mobilize fixed deposits for their corporate clients. They take care of the procedural and legal aspects, and also mange the collection and subsequent servicing of the deposits. Advice with regard to the amount to be raised, interest charges, terms of deposits and other related issues are also offered to the client.

Relief to Sick Industries The services offered by merchant bankers to sick industries can be summarized as follows: 1. Assessment of capital requirements and counseling on capital restructuring; 2. Appraisal of technological, environmental, financial and other factors causing sickness; 3. Preparations of programs and packages for rehabilitation of sick units; 4. Providing necessary assistance where the rehabilitation package involves mergers or amalgamation; 5. Obtaining necessary approval for implementation the rehabilitation package from the statutory authorities; 6. Monitoring the implementation of the scheme of rehabilitation.

43

Merchant Banking in India

Qualities of merchant bankers:To be a successful merchant banker, following qualities are necessary: 1. Knowledge: Thorough understanding of technical issues related to

business, understanding of legal and statutory requirements, appreciation of business acumen; financial expertise is a key thing a merchant banker must know. Delivery of his services depends on his basic understanding of these issues.

2. Capital market familiarity: Merchant banker should be well versed

with stock markets, their movements. He should track imp happenings in the market on ongoing basis.

3. Liasioning ability: Merchant bankers are required to liaison with SEBI,

RBI, the stock exchanges, depositories and other government authorities for public issue related duties. It is imperative that a merchant bank maintains excellent rapport with all of them and also close relations even at informal levels. This only can see speedy and favorable clearances by the authorities.

44

Merchant Banking in India

4. Innovation: Corporate may approach with unique requirements.

Standard solutions and products may not solve problems sometimes. Merchant bankers should do out of box thinking and be able to do financial engineering. They can device new financial instruments and get approved from the authorities. Innovation is required even to address stringent legal requirements.

5. Integrity: Merchant banker has valuable and confidential information of

its customers. Merchants bankers should take utmost care that the information is not leaked and also not consumed for the purpose other than for which it was disclosed to the merchant banker.

45

Merchant Banking in India

Problems and hurdles:Not many but some problems are faced by Indian merchant bankers. I.

Industry compartmentalization: company which is in merchant banking

business would have expertise in underwriting, hire purchase, leasing, and portfolio management, money-lending. But RBI does not permit merchant banking firms to get into these activities. So the same promoters have to setup different companies for different purposes. Management cost increases and expertise pooling i.e. multiple use of same talent is not possible. II. Malafide practices: India corporate culture is bettering. but still many

corporate have excessively friendly approach. Favored allotment of shares, tampering with project appraisal report to bankers is common. Corporate like to use merchant bankers for malafide intentions. This gives growth to more boutique fly-by-day firms. Giant professional or multinational merchant bankers are cautions in their approach to Indian market.

III.

Regulations: though regulations are much better now, there is still scope for further improvement. Merchant bankers can be made more accountable and responsible. Professional qualification focused on merchant banking is not available. Industry is not well organized and all the players do not play the same tune. This is specifically evident in comparison with insurance industry and mutual funds industry.

46

Merchant Banking in India

Scope for merchant banking in India:Scope for merchant banking depends upon size of the market, restriction-liberation,

banking

policies,

corporate

culture,

and

corporate dynamics.

1.

Size and dynamics of the market: Indian market is growing. In fact

India is one of the largest emerging markets. Obviously, public issues, FDI, debt raising are on rise. Lots of new and green fried projects are happening. Merchant bankers have lots space to contribute. 2. Restrictions-liberalization: more liberal the market is, more the

things left to be decided by the corporate. Merchant bankers assist in decision making and hence their scope increases. With significant market freedom, merchant bankers work has increased many folds.

3. Banking policies: RBI prefers that commercial banks do not indulge

in merchant banking business directly. They should setup a subsidiary for the purpose. This limits scope of commercial banks and gives space to merchant bankers. This policy also results in fair business practices. Some countries allow commercial bankers to get involved in IPO’s, placement of debentures, etc. Indian scenario is favorable to merchant bankers.

47

Merchant Banking in India

4. Corporate culture: corporate can do project appraisal, strategic

restructuring in house as well. If the corporate prefer third-party independent assessment, then only they will engage merchant bankers. Otherwise merchant banker’s role is only statutory as in issue management. India inc. apparently prefers and is happy with merchant bankers work. 5. Corporate dynamics: more happening in business gives more

opportunities to merchant bankers. Mergers, takeover acquisition, new Greenfield projects, fund raising for government institutions, active money market are all providing better business prospectus to merchant bankers.

48

Merchant Banking in India

Progress of Merchant Banking in India:Upto 1970, there were only two foreign banks which performed merchant banking operations in the country. SBI was the first Indian commercial bank and ICICI the first financial institution to take up the activities in 1972 and 1973 respectively. As a result of buoyancy in the capital market in 1980’s some commercial banks set – up their subsidiaries to operate exclusively in merchant banking industry. In addition, a number of large stock broking firms and financial consultants also entered into business. Thus, by the end of the end of 1980’s there were 33 merchant bankers belonging to three major segments viz., commercial banks, all India financial institutions, and private firms. Merchant banking functions of these institutions was related only to management of new capital issues. Merchant banking industry which remained almost stagnant and stereotyped for over two decades, witnessed an astonishing growth after the process of economic reforms and deregulation of Indian economy in 1991. The number of merchant banks increased to 115 by the end of 1992-93 300 by the end of 1993-94 and 501 by the end of August, 1994. all merchant bankers registered with SEBI under four different categories include 50 commercial banks, 6 all Indian financial institutions – ICICI, IFCI, IDBI, IRBI, Tourism Finance corporation of India, infrastructure Leasing and Financial Services Ltd. and private merchant bankers. In addition to Indian Merchant Bankers, a large number of reputed international Merchant Bankers like Merrill Lynch, Morgan Stanley,

49

Merchant Banking in India

Goldman Sachs, Jardie Fleming Kleinwort Benson etc. are operating in India under authorization of SEBI. As a result of proliferation, Indian Merchant Bankers are faced with severe competition not only among themselves but also with the well developed global players.

CURRENT AFFAIRS RBI allows cash withdrawal from merchant banker terminals



Besides ATMs, customers can now also withdraw cash up to Rs1000 from terminals at different merchant establishments, the Reserve Bank. As a further step towards enhancing the customer convenience in using the plastic money, it has been decided to permit cash withdrawals at POS (point of sale) terminals. To start with, this facility will be available for all debit cards issued in India, up to Rs1000 per day," RBI said in a statement issued here. The use of debit cards at POS terminals at different merchant establishments has been steadily increasing, it said. This facility is available only against debit

cards

issued

in

India.

At present cash withdrawal facility using plastic cards is available only at Automatic Teller Machines (ATMs) with the number of ATMs in the country at 44,857. There are 4,70,237 POS terminals in the country. This facility may be made available at any merchant establishment designated by the bank and would be available whether the card holder makes a purchase or not.  Morgan Stanley makes i-banking comeback The joint venture between JM Financial and Morgan Stanley was inked in 1997 and formalized in 1999. The JV had investment banking operations

50

Merchant Banking in India

other than equity broking, research, wealth management and advisory and securities distribution operations. Post the split, JM Financial acquired the investment banking company together with its subsidiaries, which were engaged in fixed income, equity broking, wealth management, advisory and distribution businesses of $ 20 million. The Indian partner sold its 49% holding in JM Morgan Stanley Securities (JMSPL), the institutional equity broking company to Morgan Stanley for $ 445 million. Bulge bracket investment banking major, Morgan Stanley has re-entered investment banking business on its own, after parting ways with JM Financial — its former Indian partner.  PNB aims profit of 7,500crore by 2013 The country's second largest public sector lender Punjab National Bank aims to double its profit to Rs7,500 crore in the next four years. "The bank has set a target to expand total business to Rs10crore and earn net profit of Rs7,500 crore by 2013," said PNB Chairman and Managing Director K C Chakrabarty, who is charge of Deputy Governor of RBI. The growth driver would be better asset liability management, thrust on recovery, focus on customers and financial inclusion, he had said. Besides, the bank plans to open new line of businesses in the current fiscal including merchant

banking

subsidiary.

PNB Investment Services aims to provide investment consultancy and merchant banking services and would be operational in the next three months. Currently, these operations are run by a division of the bank.  ICICI Bank to oversee mergers and acquisitions

51

Merchant Banking in India

ICICI bank and its merchant banking arm, ICICI Securities (I-Sec), have entered into an agreement, whereby all M&A deals will be done out of ICICI Bank. The agreement goes on to define an M&A deal as one which involves

change

in

management

control.

This arrangement replaces the earlier practice of both I-Sec and ICICI Bank working together on M&A deals. “Since a predominant number of people, who wish to be advised on M&A, also look for acquisition finance, it was decided that the business should be housed in the bank,” I-Sec MD Madhabi Puri Buch told ET. “Now, if a corporate is seeking a sell mandate or a buy mandate, where the transfer of controlling interest takes place, the deal will be

done

by

ICICI

Bank.”

ICICI Bank had initially entered the investment banking space in 2006. Over the past couple of years, both the bank and its subsidiary have been vying for deals. The new deal has taken into effect between both the entities from April 1.  Birla Capital and Financial Services gets SEBI merchant banking license Birla Capital & Financial Services Ltd has been granted a merchant-banking license by the Securities and Exchange Board of India. The license will enable the company to offer a wide range of on-shore investment banking advisory

and

underwriting

services

in

the

Indian

market.

The company, which is a part of the Yash Birla conglomerate, will initially concentrate on regulated services like initial public offerings, takeover,

52

Merchant Banking in India

buybacks, delisting and valuations. It also offers non-regulated services like PE Syndication, M&A Advisory and other corporate advisory. Birla Capital & Financial Services Ltd. is part of the 3,000-crore Yash Birla Group that has diversified interest in sectors like auto & engineering, textiles & chemicals and power & electrical, education & IT.

Primary market slowdown, affects merchant bankers’ wallet



The recent slowdown in the primary market has impacted not only investors but merchant bankers as well, as there has been a significant decline of nearly 60 per cent in their percentage fees so far this year. "There is a clear drop in the merchant banking fees to Rs 216crore in comparison to Rs. 771crore for the calendar year 2007, indicating a drop of 57.9 per cent on annualized basis," Nexgen Capitals, the merchant-banking arm

of

brokerage

firm

SMC

Global

Securities.

Merchant bankers are those who advise the issuer about the public offer and manage

the

issue.

The average percentage fees has declined to 1.21 per cent so far this year from

2.24

per

cent

in

2007,

the

report

added.

Reliance Power IPO of Rs 11,563 crore during this year with the merchant banking fee of Rs 50.6 crore, amounting to 0.44 per cent of the issue size had a great bearing on this trend.  Nomura launches its investing banking operations in India

53

Merchant Banking in India

Nomura Financial Advisory and Securities (India) Private limited ('Nomura India'), a wholly-owned subsidiary of Nomura Holdings, Inc. ('Nomura'), has launched its equity sales and trading and investment banking operations in

India.

In October 2008, Nomura, a global investment bank, acquired the majority of Lehman Brothers' employees in India, including the equities sales and trading, equity research, fixed income liquid markets sales and trading, and investment

banking

teams.

By integrating the former Lehman Brothers India franchise and obtaining its merchant banking licence and stock exchange memberships, Nomura India said in a statement it has significantly expanded its capabilities in India through a wide range of onshore financial solutions spanning securities brokerage, securities underwriting and advisory services.

54

Merchant Banking in India

Association of merchant bankers in India (AMBI):

Association of merchant bankers in India is a professional non-profit company setup to represent the industry. It is expected to set code of ethics and facilitate dialogue between the industry and regulatory bodies. Training and awareness programs are also expected from AMBI. Because of lack of support from the members and non-initiative from SEBI/government, AMBI is dormant at present. ARTICLES:AMBI-SEBI talks on SRO ENS ECONOMIC BUREAU MUMBAI, May 8: The Association of Merchant Bankers of India (AMBI) is proposing to have an exhaustive dialogue with the Securities and

55

Merchant Banking in India

Exchange Board of India (SEBI) on its functioning as a self-regulatory organization (SRO). This follows a feeling among AMBI members that it is being sidestepped when decisions relating to merchant bankers are being taken. AMBI was given SRO status in 1995, but it has not really been officiating as one. Recently the association was really piqued when SEBI asked one of its members to stop taking up further assignments without so much as giving it any notice. AMBI feels that the member should have been given a fair hearing and also feels that AMBI as the SRO should have been informed about the decision. A committee has subsequently been set up by AMBI to go into the matter. Then there was the issue of asking all merchant bankers to furnish details of employees to SEBI. This was also demanded without consulting/informing AMBI. The association has already made its disappointment clear to SEBI and the proposed

dialogue

is

reportedly

misunderstandings.

56

being

undertaken

to

clear

all

Merchant Banking in India

EXAMPLE:-

MERCHANT BANKING SERVICES INTRODUCTION Canara Bank is also one of the leading Merchant Bankers in India, offering specialized services to Banks, PSUs, State owned Corporations, Local Statutory

bodies

and

corporate

sector.

Its SEBI registered Category I Merchant Banker / Underwriter to carry on Issue Management (Public / Rights / Private Placement Issues), Underwriting, Consultancy and Corporate Advisory Services etc. They also hold SEBI registration Certificate to act as "Bankers to an Issue" with network of exclusive Capital Market Service Branches to handle 57

Merchant Banking in India

“Capital

Market"

related

assignments.

They undertake "project appraisals" with resource raising plans from Capital Market/ Debt Markets and facilitate tie-ups with Banks / Financial Institutions

and

Potential

Investors.

Their uniqueness is extending services under single window concept covering the following areas: 1. Merchant Banking 2. Commercial Banking 3. Investments 4. Bankers to Issue - Escrow Bankers 5. Underwriting 6. Loan Syndication As leading Merchant Bankers in India, they have associated with issues ranging from Rs.1crore to Rs.1500 crores, involving various types of industries, banks, statutory Bodies etc. and have an edge in handling Private Placement

issues

–

both

58

retail

&

HNIs.

Merchant Banking in India

SPECTRUM OF SERVICES:1.

Equity Issue (Public/Rights) Management

2.

Debt Issue Management

3.

Private Placements

4.

Project Appraisals

5.

Monitoring Agency Assignments

6.

IPO Funding

7.

Security Trustee Services

8.

Agriculture Consultancy Services

9.

Corporate Advisory Services

10.

Mergers and Acquisitions

11.

Buy Back Assignments

12.

Share Valuations

13.

Syndication

ISSUE MANAGEMENT SERVICES:1.

Project Appraisal

2.

Capital structuring 59

Merchant Banking in India 3.

Preparation of offer document

4.

Tie Ups (placement)

5.

Formalities with SEBI / Stock Exchange / ROC etc.,

6.

Underwriting

7.

Promotion /Marketing of Issues

8.

Collecting Banker / Banker to an issue

9.

Post Issue Management

10.

Refund Bankers

11.

Handling of Dividend Warrant/Interest Warrant Payments

12.

Debenture Trusteeship

Investment Criteria:A wide range of later stage opportunities are considered. Targeted companies include the following characteristics: 1. Having weathered the start-up process and established a core business model that is sustainable; 2. Proven management team; 3. If not already profitable, visibility to profitability within a 12-month period;

60

Merchant Banking in India

4. Having established business partnerships that give it a major position in a market space; 5. Significant barriers to entry; and 6. Technology or business that is scalable with global applications. They look for opportunities for synergistic consolidation and/or companies that are on the verge of extraordinary growth.

STATE BANK OF INDIA SBI’s Merchant Banking Group is strongly positioned to offer perfect financial solutions to your business. They specialize in the arrangement of various forms of Foreign Currency Credits for Corporate. They provide the resources, convenience and services to meet your needs by arranging Foreign Currency credits through:

61

Merchant Banking in India

• Commercial loans • Syndicated loans • Lines of Credit from Foreign Banks and Financial Institutions • FCNR loans • Loans from Export Credit Agencies • Financing of Imports. They are internationally the most Preferred Bank by Export Credit Agencies for Guarantees in case of the Indian Clients or Projects.

SBI being an Indian entity has no India exposure ceiling. Their Primary focus is On Indian Clients. SBI’s seasoned Team of professionals provides you with Insightful credit Information and helps you Maximize the Value from the transaction.

PRODUCTS AND SERVICES 1] Arranging External Commercial Borrowings (ECB) 2] Arranging and participating in international loan syndication 3] Loans backed by Export Credit Agencies 4] Foreign currency loans under the FCNR (B) scheme 5] Import Finance for Indian corporates.

62

Merchant Banking in India

PUNJAB NATIONAL BANK India’s one of the Leading Nationalized Bank established in 1895, serving over 3.5crore customers through 4520 branches and 439 extension counters is the largest amongst Nationalized Banks. The Bank has recently been ranked 21st among top 500 companies and 9th among top 50 brands by the Economic Times. All the Branches of the Bank have been computerized. The Bank has a concept of "Any Time, Any Where Banking" through the introduction of Centralized Banking Solution (CBS) and over 2511 offices have already been brought under its ambit.

63

Merchant Banking in India

The Bank is registered with SEBI as Category – I Merchant Banker for providing all the major Merchant Banking services. Our gamut of Merchant Banking services includes: • Issue Management Services – to act as Book Running Lead Manager/Lead Manager for the IPOs /FPOs/Right issues/Debt issues • Project appraisal • Corporate Advisory Services • Underwriting of equity issues • Banker to the Issue/Paying Banker • Refund Banker • Monitoring Agency

• Debenture Trustee • Marketing

of

the

issue

through

a

strong

network

of

QIBs/HNIEs/Corporates and Retail investor. The Bank itself is one of the major investor in the market having a treasury of 45000 crores. Their Software for handling the Refund Banker is one of the best systems in the industry. Its unique features provides online payment of the instrument by our 2470 branches in 733 centers, online status of paid instruments, 100% reconciliation at any point of time etc. The Bank has an exclusive and specialized Capital Market Service Branch at New Delhi for providing Merchant Banking Services to the Corporate

64

Merchant Banking in India

CONCLUSION The merchant banker plays a vital role in channelising the financial surplus of the society into productive investment avenues. Hence before selecting a merchant banker, one must decide, the services for which he is being approached. Selecting the right intermediary who has the necessary skills to meet the requirements of the client will ensure success. It can be said that this project helped me to understand every details about Merchant Banking and in future how it’s going to get emerged in the Indian economy. Hence, Merchant Banking can be considered as essential financial body in Indian financial system. Market development is predicted on a sound, fair and transparent regulatory framework. To sustain the growth of the market and crystallize 65

Merchant Banking in India

the growing awareness and interest into a committed, discerning and growing awareness and interest into an essential to remove the trading malpractice and structural inadequacies prevailing in the market, and provide the investors an organized, well regulated market.

66