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CHAPTER 1 - INTRODUCTION
A Merchant Bank is a British term for a bank providing various financial services such as
accepting bills arising out of trade, providing advice on acquisitions, mergers, foreign exchange,
underwriting new issues, and portfolio management. A Merchant Bank can be generally
described as a financial services company with a private equity investment arm offering
investment banking and ancillary services as well. Because a merchant bank acts not only as an
advisor and broker but also as a principal, a merchant bank has a longer term approach than a
typical investment bank and is highly concerned with the viability of each investment
opportunity and providing the right advice for a strong partnership with each client company.
In banking, a merchant bank is a traditional term for an Investment Bank. It can also be used to
describe the private equity activities of banking. This article is about the history of banking as
developed by merchants, from the Middle Ages onwards.
Amidst the swift changes sweeping the financial world, Merchant Banking has emerged as an
indispensable financial advisory package. Merchant banking is a service-oriented function that
transfers capital from those who own to those who can use it. They try to identify the needs of
the investors & corporate sector & advice entrepreneurs what to do to be successful.
Merchant Banking, as the term has evolved in Europe from the 18th century to today, pertained
to an individual or a banking house whose primary function was to facilitate the business process
between a product and the financial requirements for its development. Merchant banking
services span from the earliest negotiations from a transaction to its actual consummation
between buyer and seller.
In particular, the merchant banker acted as a capital sources whose primary activity was directed
towards a commodity trader/cargo owner who was involved in the buying, selling, and shipping
of goods. The role of the merchant banker, who had the expertise to understand a particular
transaction, was to arrange the necessary capital and ensure that the transaction would ultimately
produce "collectable" profits. Often, the merchant banker also became involved in the actual
negotiations between a buyer and seller in a transaction.

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DEFINITION OF MERCHANT BANKING:
A bank that deals mostly in (but is not limited to) international finance, long-term loans for
companies and underwriting. Merchant banks do not provide regular banking services to the
general public.
The Notification of the Ministry of Finance defines 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 services in relation to such issue management
The Amendment Regulation specifies that issue management consist of Prospectus and other
information relating to issue, determining financial structure, tie-up of financiers and final
allotment and refund of the subscriptions, underwriting and portfolio management services.
In the words of Skully A Merchant Bank could be best defined as a financial institution
conducting money market activities and lending, underwriting and financial advice, and
investment services whose organization is characterized by a high proportion of professional
staff able to able to approach problems in an innovative manner and to make and implement
decisions rapidly.
What is merchant banking??
What does merchant banking mean exactly??
Well there are many meanings for a merchant bank. It is not because the term merchant
banking is misunderstood but its because a merchant bank in its nature performance many
function which most of the other banks dont do. It is an institution or an organization which
provides a number of services including management of securities, portfolio management,
underwriting of capital and issue, insurance, financial advice and project counseling etc. Large
brokers, Mutual Funds, Venture capital companies and Investment Banks offer merchant
banking services. Given below are some very important functions that a merchant bank
performs in its day to day functioning.


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QUALITIES OF A MERCHANT BANKER:
Ability to analyse
Abundant knowledge
Ability to built up relationship
Innovative approach
Integrity

WHO ARE MERCHANT BANKERS?
-Merchant banks are private financial institution.
-Their primary sources of income are PIPE (Private Investment In Public Entities) financings and
international trade.
-Their secondary income sources are consulting, Mergers & Acquisitions help and financial
market speculation.
-Because they do not invest against collateral, they take far greater risks than traditional banks.

-Because they are private, do not take money from the public and are international in scope, they
are not regulated.
-Anyone considering dealing with any merchant bank should investigate the bank and its
managers before seeking their help.
-The reason that businesses should develop a working relationship with a merchant bank is that
they have more money than venture capitalists. Their advice tends to be more pragmatic than
venture capitalists.



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CHAPTER 2 - FUNCTIONS OF MERCHANT BANKERS


Consulting advice on going public and international business.
Advice and help in taking your company public. If they are unwilling to supply Investment
Banking bridge loans, they have a low cost strategy for taking your company public.
They do PIPE (Private Investment in Public Equities) financings.
They can advise or help with a company's M&A strategy.
They are essential advisors for companies seeking to become multinational corporations
Significance Of The Study
It would help us to develop the ability to study the functioning of Merchant Banking in India &
learn & apply multidisciplinary concepts, tools & techniques to solve vital problems.
It familiarizes with the various services provided by Merchant Bankers.
They would help us to draw comparison between public & private sector companies engaged in
Merchant Banking activities.
Based upon the comparison, it would help us to determine which sector has more growth
potential & where should one invest his/her funds to maximize the return at minimum risk.
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THE IMPORTANT FUNCTIONS OF MERCHANT BANKERS ARE:
Management of Debt and Equity Offerings:
This forms the main function of the merchant banker. He assists the companies in raising funds
from the market. The undergoing tasks include instrument designing, pricing the issue,
registration of the offer document, underwriting support, marketing of the issue, allotment and
refund and listing on stock exchanges.
Placement and Distribution:
The merchant banker helps in distributing various securities like equity shares, debt instruments,
mutual funds, insurance products, and commercial paper, to name a few. The distribution
network of the merchant banker can be classified as institutional and retail in nature. The
institutional network consists of mutual funds, foreign institutional investors; private equity
funds pension funds, financial institutions, etc.
Corporate Advisory Services:
Merchant bankers offer customized solutions to their clients financial problems. Financial
structuring includes determining the right debt-equity ratio and the framing of appropriate capital
structure theory.
Project Advisory Services:
Merchant bankers help their clients in various stages of the project undertaken by the clients.
They assist them in conceptualizing the project idea in the initial stage. Once the idea is formed,
they conduct feasibility studies to examine the viability of the proposed project.
Loan Syndication:
Merchant bankers arrange to tie up loans for their clients. This takes place in a series of steps.
Firstly, they analyze the pattern of the clients cash flows, based on which the terms of the
borrowings can be defined. Then the merchant banker prepares a detailed loan memorandum,
which is circulated to various banks and financial institutions and they are invited to participate
in the syndicate. The banks then negotiate the terms of lending on the basis of which the final
allocation is done.
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Providing Venture Capital Financing:
Merchant bankers help companies in obtaining venture capital financing for financing their new
and innovative strategies.
Project Appraisal
This service helps corporates analyze the soundness of a project, which may be setting up a new
unit/expansion/modernization etc. It is a process of examining the technical, commercial,
financial and economic viability of a project to ensure that it generates sufficient returns on the
resources invested in it. The study of viability involves detached verification of projects ability
to stand the tests of technical, financial and commercial feasibilities and managements
capabilities to successfully implement and run the project. A service project report will be
prepared for the company, including finalization of capital structure. Project appraisal includes:
- Financial appraisal (liquidity analysis, capital structure analysis, profitability analysis etc
- Technical appraisal (factors of production, technology, civil works, site location etc)
- Economic appraisal (also known as cost-benefit analysis, social cost, impact on employment,
impact of the economy)

Issue Management
This is the primary function of merchant bankers. It refers to the management of securities
offering of corporates to the general public and existing shareholders on rights basis. Merchant
bankers act as lead managers and assists companies in arriving at quantum and nature of issue
and obtaining consent/clearance from various statutory authorities, preparing draft prospectus,
obtaining approval from appropriate authorities etc. it also assists companies in tying up with
underwriters for the issue, appoint other intermediaries like brokers, bankers, advertising agents,
registrar to the issue and co-ordinates the activities of these agencies and institutions from the
successful flotation of the issue. It also helps in listing the securities in stock exchange, finalizing
basis of allotment, arranging for refund, handling investor complaints etc.
Merchant banks help companies raise funds by selling shares to the public by issuing prospectus,
Shares may be issued at par, premium or discount.



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Underwriting of issues
In order to ensure full subscription or the stipulated minimum subscription of 90% of the issue,
companies enter into an agreement with financial institutions, banks, brokers and bankers to
underwrite the issue amount. Merchant bankers can underwrite issues and assist companies in
tying up with other underwriters

Corporate Counseling
Rendering assistance to corporate clients on various aspects of business operations in the areas of
financial planning, performance budgeting, restructuring capital, and other aspects of financial
management and monitoring systems and operations

Bankers to the issue
Collection of subscription money/application money for an issue from the investors,
acknowledgement, proper accounting of the money received, sending reports/certificates,
informing collection details are the services provided in the banker to the issue role.

Investment Counseling
This activity involved assisting firms, companies, trusts, funds and associations in the choice of
shares and stocks for investment depending upon the needs and the risk-return trade-off, as well
as taxation and time considerations.

Portfolio Management Services
A portfolio is a collection of different kinds of investments. Merchant bankers provide portfolio
management services.

Registrar and Transfer Agent
Transfer agency work involves carrying out transfer work in respect of securities after complying
with stipulated formalities/procedures. Preparation and printing of dividend warrants and
dispatching them to share holders is also covered here. Other services include attending to
complaints of applicants/investors, coding and verification of applications, allotment, processing
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and dispatching allotment letters, providing various documents and certificates etc.

Mergers, amalgamations and Acquisitions
Some companies desire to restructure themselves in order to effectively meet competition.
Merchant bankers provide all requisite guidance and services for restructuring, to prepare due
diligence, necessary clearance from statutory bodies like SEBI, ROC etc as per the statutory
stipulations, for the process of mergers, acquisitions and amalgamations.

Venture Capital
Merchant Bankers help co obtaining venture capital for financing their new and innovative
strategies.
Non-resident investment
Merchant bankers provide investment advisory services to attract NRI investment in primary and
secondary markets, undertake buying and selling securities on their behalf, secure clearances
from RBI under FEMA for repatriation of interest and dividends etc.

Joint ventures
Merchant Bankers help corporates with joint ventures in India and abroad.









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CHAPTER 3 - MERCHANT BANKING IN INDIA:

Merchant banking activity was formally initiated into the Indian capital Markets when Grind lays
bank received the license from Reserve Bank in 1967. Grind lays started with management of
capital issues, recognized the needs of emerging class of entrepreneurs for diverse financial
services ranging from production planning and system design to market research. Even it
provides management consulting services to meet the requirements of small and medium sector
rather than large sector. Citibank Setup its merchant banking division in 1970. The various tasks
performed by this divisions namely 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 offer to their clients from 1972. State bank of India started the merchant
banking division in 1972. In the Initial years the SBIs objective was to render corporate advice
And Assistance to small and medium entrepreneurs. Merchant banking activities is OF course
organized and undertaken in several forms. Commercial banks and foreign development finance
institutions have organized them through formation divisions, nationalized banks have formed
subsidiaries companies and share brokers and consultancies constituted themselves into public
limited companies or registered themselves as private limited companies. Some merchant
banking outfits have entered into collaboration with merchant bankers abroad with several
branches.











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CHAPTER 4 - FACTORS RESPONSIBLE FOR THE CHANGES:
Globalization of Indian Economy has made the whole economy open, which has more
multinational player in the era of the financial services? This has resulted in to the emergence of
the global investment in financial sector. Government has now open up the doors of investments
especially in the area of banks and insurance, which leads to competitive environment for the
present players. Now they have to bring something new which is efficient and best services to
live in the competitive environment. Competition arising out of Private Company Participation is
due to the liberalization of the economy. Now along with the public/government players, private
players are also offering financial services and instruments, which are more innovative and
different than the earlier offering. All around, there is a fresh thinking on the financial products,
structure of banking and insurance instruments with value creation. Financial markets are being
redefined, reinvented and reconfigured on a persistent basis.

CHANGING CUSTOMER DEMOGRAPHICS:
If we look at the all-growing economies like China, Germany and Brazil, India has 35% of the
population in the age group of 15years to 34 years. It is estimated that by 130mn plus people get
added to working population by 2009 with 55 million families (320 million people) will be
added in the middle-income group (0.1 to 0.3 Million Rs). The demographic change leads to the
change in the need of the customer. Changing Customer Needs customers have larger segment in
corporate decision-making they are the final judges of the every single activity offered by the
marketer. Banks in India have traditionally offered mass banking products. Financial market has
turned into a buyer's market. Market focus is shifting from mass banking products to class
banking with introduction of value added products. Today, financial institutions are co-designing
the products/services with their customers and striving to provide them with global solutions

Technology Improvements Technology is also helping market players redefine the way they
have been operating in the market. In today's time it becomes vary easy for a customer to transfer
a fund from one location to another location with CLICK of Mouse. Availability of the concepts
like phone banking, anytime banking etc. has become possible because of the technological
developments only. Government Reforms Government is major decision player in the financial
market. It decides the proportion of the investment limits as well as the regulation and control. In
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last ten years government is designing its policy with more liberal and competitive content.
Which it are welcome trends for the emerging financial services. Heightened focus on customer
relations the bank of the future has to be essentially a marketing organization that also sells
banking products. New distribution channels are being used; more & more banks are outsourcing
services like disbursement and servicing of consumer loans, Credit card business. Direct Selling
Agents (DSAs) of various Banks go out and sell their products. They make house calls to get the
application form filled in properly and also take your passport-sized photo.

REVOLUTION IN BANKING SECTOR:
Banking in India originated in the first decade of 18th century with the General Bank coming
into existence in 1786. Bank of Hindustan followed this. Both these banks are now defunct. The
oldest bank in existence in India is the State Bank of India being established as the Bank of
Calcutta in Calcutta in June 1806. In the early 1990s the then Narasimha Rao government
embarked on the policy of liberalization and gave license to small number of private banks,
which came to be known as new generation tech-savvy banks such as ICICI Bank and HDFC
Bank. Currently in 2005, banking in India is considered fairly matured in terms of supply,
product range and reach-even though reach in rural India still remains a challenge for the private
sector and foreign banks. With the growth of Indian economy expected to be strong for quite
some time especially in its service sector, the demand for banking services specially retail
banking, mortgage and investment services are expected to be strong.










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CHAPTER 5 - THE EMERGING AREAS IN BANKING SERVICES ARE;

Leasing Services
The Indian company investors must be acknowledged that lease is that agreement under which
the company or Indian firm acquire the exact right and make use of certain capital asset on the
consideration of payment of rental charges. The Indian corporate company must equally known
that it cannot equally know that it cannot acquire any kind of ownership to such an asset apart
from making use of it. The user comparatively pays all the expected operating costs and also the
maintenance expenses. The main corporate companies must equally take into the consideration
that developed countries like America, United Kingdom the companies of such a countries are
commonly depending on the leasing factor. In India since the era of liberalization, many of the
Indian companies have equally been involved in the leasing transactions. On the other side, many
financial institutions and even the commercial banks in the Indian financial sector have
comparatively been accepted over the same transactions.

Mutual Funds Services
The Indian corporate companies must equally be informed that the mutual funds comprises of the
exact funds gained by pooling all the public savings. The mutual funds are comparatively
invested in those portfolios, which are commonly diversified in nature with the main objectives
of sharing the risk. The Indian small-scale investors cannot be able to get their funds from the
comparative big corporate companies can equally gain there working funds from the mutual
funds.However, the modern concept of the mutual funds was developed in1968 in London by the
foreign and colonial government trust of London. By which it gained its invention in India in
early 1980, even if it was exactly started in 1964 by the unit trust of India.
In addition to the above, the mutual funds can be grouped into [a] Close ended funds & [b] Open
ended funds. The Indian corporate companies can only benefits from the mutual funds on
gaining savings for investment, better yield low cost on investment, tax benefits, flexible on
investment, promoting industrial development reducing the cost of new issue and many more
other advantages. On the other side, Indian corporate companies must be informed on the kind of
risks involved with the mutual funds like market risks, scheme risks, business risk, investment
risks and even the political nature of risks. While the investors are selecting the funds must take
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into account the objectives of the fund, consistency of performance of the funds. Historical
background of the funds, cost of operation, capacity for innovation, the investors servicing,
market trends, and even the transparence of the fund management. For the Indian mutual funds
to have good future there must be full support of SEBI better control of capital issue, better
interest rate, good PE ratio, investors must have good choice, tax concessions, and many more.

Hire Purchase Services
In the hire purchase kind of transaction is that method of selling by which goods are left out on
hiring by the Indian corporate company to the purchaser by which the hirer is comparatively
required to the payment on an agreed sum of amount in the system of periodical installments. In
the hire purchase the Indian corporate companies must know that the ownership of such kind of
the property exactly remain under the control of the creditor who normally passes the right to
hirer on the condition of payment of the last agreed sum of money in installment.
The Indian corporate company must know that legally, payment is made in installment over the
agreed specified period, possession of the same right is delivered to the purchaser during the time
of agreement, the property passes to the exact purchaser on the agreed last installment, and the
hirer has a right to return the property without further installment. In addition to the above, the
Indian corporate company must know that the agreement must comparatively contain the nature
of the goods as described in manner so that to identify them easily, the nature of the hire
purchase price, the date of commencement and finally the extend or number of installments.

Venture Capital Services
The venture capital is that investment in the new Indian enterprises without stability in growth.
It's that environment of capital, shareholding and even the setting up of small firms, which are
comparatively specializing, in same new technological ideas in the commercial sectors.
The venture capital is equity participation, it's of high risk in nature, it's also available only for
commercialization of new technologies and it's the exact promoter of the projects, and it's
continuous in nature and input of the firm. The Indian corporate companies must equally know
that venture capital involves the development of project idea, implementation, fledging or
additional financing, and establishment stage. The main importance of venture capital to Indian,
corporate companies are the reduction of risk, easy to analyze the business prospects and to
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assume the investors on affairs of the business. The Indian methods of venture financing are
equity participation, income notes, the conventional loans and even the conditional loans. In
order to promote the venture capital growth in India, there must be tax concessions for capital
gains, high level development of capital market, giving of fiscal incentives to Indian corporate
companies, high level participation of the private sectors the improving and reviewing of the
existing laws and limited partnership and many more.

Discounting, factoring and forfeiting services
Due to the exact trade transaction the trade bill comparatively arises, the Indian corporate
companies must take into consideration that the supplier of the exact goods draws bill which is
based on the purchase for the invoice price of goods sold on credit method of which is drawn on
the short period of time. The buyer pays the amount on the exact date by which the supplier of
goods has to await until the expiry of the exact bill. However, the banks provides the cash
discounting based on the exact trade bills by which they deduct certain charges as discount based
on the amount of the bill and credit balance of the customers account.

Factoring
Factoring is to get thing being done. The ward factor means to mark or to do according to R.W.
Johnson factoring is a service involving the purchase by financial organization, called a factor of
receivables owned by manufacturers and distributors by the customers with the factor assuming
full credit and collection responsibilities. The main conditions of factoring that the Indian
corporate companies must know are these must be assignment of debt that has to be in favour of
the factor. The selling limits for the client, the factor must have recourse to the client in the case
of non-payment by the customer; the factor will equally have recourse in case of non-payment,
details on payment for the services, interest and limit of any overdraft facility charged. The
Indian corporate companies must be well informed about the types of factoring as full service,
recourse factoring, maturity, bulk, invoice, agency and also international factoring. At the same
time the exact cost of factoring like the pricing, fee, discount, accounting system must be taken
into consideration.

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Forfeiting
Forfeiting is the French term means "to give something" or "give one's right". Generally the term
forfeit is non-recourse purchase by the commercial bank or any other financial intermediaries or
institutions receivables that equally arises from the export of the goods.

Securitization of Debt Services
The securitization is that process by which the liquidating of the liquid and the long term assets
of the Indian corporate companies like the loans and receivables by the issuing marketable
securities against the same. However, the Indian corporate companies must know that
securitization is that technique by which the exact long term, non-negotiable instruments are
equally converted into securities of such kind of small value in nature which can be easily
transacted in the commercial capital market.In India, apart from the above, there is low and
unpopularity of securitization due to introduction of it as it's a new idea or concept to India,
heavy stamp duty and comparative registration fees imposed by the Indian government,
complicated and also legal transfer procedure the difficulty in the assignment of debts. Also there
is poor standard of loan documentation, problem of inadequate credit rating system, poor
accounting procedure and lack of comprehensive guidance.

Derivatives
The derivatives are those instruments, which are commonly used to derive therein-exact value of
underlying asset of the financial institutional corporate companies. The derivatives
comparatively may involve the payment or receipt of the value or income created by the
underlying assets. The main factors that are responsible for the slow growth of derivatives in
India and high level of misconception of the derivatives, the derivatives lends themselves to
leveraging, the nature of the off balance sheet, items, poor accounting system, speculative
mechanism and finally poor infrastructure system.

Credit Rating Services
According to Moody's Rating are designed exclusively for the purpose of grading bonds
according to their investments qualities". Also according to the Australian Ratings "A corporate
credit rating provides lenders with a simple system of gradation by which the relative capacity of
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companies to make timely repayment of interest and principal on a particular type of debt can be
noted". The main credit ratings in India are credit rating information service ltd (CRISIL),
investment information and credit rating agency of India (ICRA), Credit Analysis and Research
(CARE), and Duff Phelps Credit Rating Pvt. Ltd (DCR India).

OBJECTIVES OF MERCHANT BANKING IN PREVAILING ECONOMY:
To study the significance of Merchant Banking towards the development of securities
industry.
To analyze issue management regulations.
To analyze the functions of Merchant Banking in relation to rules and regulations of
SEBI.
To evaluate the performance of Merchant Bankers, both activity performance and
operational and financial performance.
To draw a conclusion and suggestions based on the analysis and experiences

ORGANIZATIONAL SET UP OF MERCHANT BANKERS IN INDIA
In India a common organizational set up 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, Canada Bank, Punjab National Bank, Bank of India, etc. some
firms are also organized by financial and technical consultants and professionals. Securities and
exchanges Board of India (SEBI) 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 set up Indias merchant banking organizations can be categorized into 4 group
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 set up plays a role on the lines of governmental
priorities and policies.
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b) Banker Base:-
These merchant bankers function as division/ subsidiary of banking organization. The parent
banks are either nationalized commercial banks 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 baking related operating
also like providing investment and portfolio management services.

d) Private Base:-
These merchant banking firms are originated in private sectors. 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
Sectors merchant banking firms have come up either as sole proprietorship, partnership, private
limited or public limited companies. Many of these firms were in existence for quite some time
before they added a new activity in the form of merchant banking services by opening new
division on the lines of commercial banks and All India Financial Institution (AIFI).
MERCHANT BANKING SERVICES:
Loan syndication
Credit syndication also known as credit procurement and project finance services. The main task
involved in credit syndication is to raise to rupee and foreign currency loans with the banks and
financial institutions both in India and abroad. It also arranges the bridge finance and the
resources for cost escalations or cost Overruns.
Broadly, the credit syndications include the following acts;
(a) Estimating the total costs
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(b) Drawing a financing plan for the total project cost-conforming to the requirements of the
promoters and their collaborators. Financial institutions and banks, government agencies and
underwriters.
(c) Preparing loan application for financial assistance from term lenders/financial
institutions/banks and monitoring their progress including the pre-sanction negotiations.
(d) Selecting the institutions and banks for participation in financing.
(e) Follow-up of the term loan application with the financial institutions and banks and obtaining
the satisfaction for their respective share of participation.
(f) Arranging bridge finance.
(g) Assisting in completion of formalities for drawl of term finance sanctioned by institution
expediting legal documentation formalities drawing up inter-se agreements etc. prescribed by the
participating financial institutions and banks.
(h) Assessing the working capital requirements.
Preparing the necessary application for a successful issue management the close liaison and
coordination with the various constituents of the public issue is an essential condition that
warrants full cooperation of all the parties affecting the cost and prospects of the issue. Merchant
banks, acting as Manager to the issue has to settle the fee for Advocate/solicitors advice,
accountants certification, brokers and banks charges, underwriters commission, printers
charges and advertising and publicity expenses and coordinates with syndicated merchant
bankers and principal brokers, stock exchanges, etc. The responsibility for all this rests upon the
merchant banker. If proper coordination is not done, the success of the issue may be rendered un
assured.
Merchant banking primarily involves financial advice and services for large corporations and
wealthy individuals.




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MERCHANT BANKING ACTIVITIES:
The Major Merchant Banking activities which the Bank offers to its clients are:
Issue Management - Management of Public Issues i.e. IPOs, FPOs, Right Issues, etc. as
Book Running Lead Manager
Bankers to the Issue
Payment of Dividend Warrants / Interest Warrants / Refund Orders
Debenture Trustee
Underwriting
Issuing & Paying Agent
Monitoring Agency
Besides promoting / marketing the above Merchant Banking Business in the Bank through
specialized Capital Market Services Branches, Merchant Banking Cells and identified branches,
the Merchant Banking Division also looks after the following activities:
Marketing of Merchant Banking Business
Monitoring / Supporting Capital Market Service Branches
Refund Paid / Payable







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CHAPTER 6 - MERCHANT BANKERS ASSIGNMENTS:
At present, the Bank is holding following Licenses from SEBI:
Merchant Banker
Banker to the Issue
Underwriting
Debenture Trustee
1. Bankers To The Issue (Collecting Banker):
Issue' business as a part of Merchant Banking business is one of the good
source of low cost deposits and, therefore, concerted efforts are to be made for its development.
From time to time, Merchant Banking Division is issuing instructions/ guidelines for the benefit
of the field staff for the efficient and effective handling of the Banker's to Issue assignments and
for the meticulous compliance of RBI / SEBI directives.
2. Payment Of Dividend Warrants / Interest Warrants (Paying Banker):
payment of dividend warrants / interest warrants is another opportunity for the
bank to get short-term deposits at nominal cost. The assignment of dividend payment not only
provides the free of cost float fund but also adds to the fee-based income of the Bank.
branches for payment assignments, which is similar to Demand Draft Payable Account under
Finacle. The product has the following unique features that ensure that the payment account of
the corporate remains reconciled at any point of time:
o Facility for upfront uploads of the instruments issued by the companies into Core
Banking system
o Online payment of the instruments by CBS branches
o Validation of instruments details by the system
o Online status update of paid instruments by the system
o Online MIS on paid/unpaid instruments at any point of time
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o Facility to cancel lost instruments and to re-upload duplicate instruments issued in lieu
thereof
o MIS on cancelled instruments
o 100% reconciliation of the corporate dividend / refund order payable by
o a/c by the system without manual intervention
suitably converted by the corporate for updating their in-house database
reconciliation of accounts. This will also help in reducing the cost of reconciliation, postage and
handling cost. To remain in the fray and be competitive in the prevailing environment in Banking
Industry, Management has approved changes in policy for bidding /offer for "Banker to Issue" /
"Payment Assignment. The policy of sharing of expenses upto80% of notional income and
waivement of the handling charges up to full extent while bidding for securing business of
Banker to Issue and Payment Assignment have been approved by the authorities. Circle Offices
are requested to forward the proposals to CGM, MBD, HO for approval.
3. Payment Of Refund Orders:
As compared to the payment of Interest / Dividend Warrants, assignments for payment of
Refund Orders is more lucrative since it involves larger amount, which at times may even run
into several crore of rupees and Deposit float is likely to remain with the Bank for a longer
period of time as the beneficiaries are widely spread and the Bank gets free publicity. Normally
the refund bankers are decided well before the issue opens. Circle Offices should maintain close
liaison with companies who a
guidelines / procedures to be followed. Powers of the Branches / Charges etc. for handling the
assignments of Bankers to the Issue/ Payment of Dividend warrants / Refund Orders etc. are
available in the circulars of the Division at the Banks website.


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4. Underwriting:
Underwriting is a contingent liability and this is one sphere of Merchant banking where outlay of
funds on the part of the bank may be involved. As such, it is necessary to be very careful in
accepting / recommending such business. Proposals that pose clear risk of devolvement should
be declined at the outset unless there is sub underwriting tie up directly or indirectly with
promoters and their related investment companies or a firm commitment of buy back on
reasonable terms. Major aspects which need close scrutiny before underwriting can be
considered are the project and its viability, project location, promoters and their track record,
product and its marketability, past performance of existing companies in the same line,
Government Policy, projected financial performance, capital market conditions, underwriting /
sub underwriting / buy back arrangements, etc.
5. Debenture Trustee:
In terms of SEBI guidelines, all debenture issues (public rights) of the companies with the
maturity period exceeding 18 months are required to have "Debenture Trustee" and its name
must be stated in the prospectus of the issue. The necessity of creation of debenture trust is to
organize the large number of debenture holders and facilitate interaction by the companies
issuing debentures with a single entity rather than individual debenture holders. Merchant
Bankers (holding valid Registration with SEBI as debenture trustee) act as Trustees for the
debenture holders to accept security created by the company, to secure the repayment of
principal and payment of interest thereon, taking action for safeguarding their interest and
enforcing their rights in times of needs.
As per SEBI guidelines lenders cannot act as Trustees to debentures/bond the issues of the
Companies who are their borrowers. Therefore, branches of the Bank must not obtain 'Debenture
Trustee' assignments of the Parties /companies which are availing Credit facilities from our
Bank.


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6. Issuing & Paying Agent (IPA):
Commercial Paper now being a stand alone product coupled with the complexity of legal frame
work and in order to protect the interest of various market players / participants for ensuring
smooth flow of the transactions in the CP market, the Issuing and Paying Agent has been made
has issued detailed guidelines with regard to issuance of Commercial Paper through L&A
Circular No. 31 dated 30.3.2007, inter-alia, providing therein the system for issuance of
Commercial Paper (CP) and providing standby facility to the issuer of Commercial Paper. In
order to ensure that the guidelines prescribed are diligently followed by issuers of CP, only a
schedule bank has been permitted to act as an Issuing & Paying Agent (IPA) for issuance of CP.
Our Bank being a scheduled bank can act as an IPA for issuance of CP. For the Functions and
Role and Responsibilities of Issuing and Paying Agent (IPA) and other guidelines, kindly refer to
Cir. No. 24/2007 dated 9.4.2007 of Merchant Banking Division available on the e-circular site of
the Bank.
7. Monitoring Agency:
In terms of SEBI (DIP) guidelines, the Company issuing the shares to public shall make
arrangements for the use of proceeds of the issue to be monitored by one of the financial
institutions, in case of issues, which exceed Rs.500crores. Though, in terms of SEBI guidelines,
it is mandatory for the issuers to appoint 'Monitoring Agency' if the issue size is more than
Rs.500crores, on the insistence of Merchant Bankers and Stock exchanges, the issuers of issues
of less than Rs. 500 crores are also appointing monitoring agency. Monitoring Agency is
required to monitor timely implementation of project and submit return on half yearly basis to
SEBI as per the format specified by SEBI.
Monitoring Agency is therefore responsible to act as under:
1. Make arrangement to ensure the monitoring of issue proceeds.
2. Ensure that the proceeds collected is being utilized for the project it was raised.
MERCHANT BANKING

24

3. Where the amount is being parked/invested till utilized for the project.
4. Cost of the project as mentioned in the offer document and revision if any to be reported to the
SEBI
5. The source for financing the revision in the cost of the project
6. Keep a track on the expenditure incurred from the amount collected.
7. If total cumulative amount raised is more than the expenditure incurred on the project, how the
surplus funds are utilized / proposed to be utilized .
8. Reasons for delay in implementation to be reported to SEBI.
9. To ensure that the Government/ statutory approvals related to the project as disclosed in offer
document are being complied with
10. The deviation if any, from the offer document is to be reported to the company and the SEBI.
Since financial institutions only have been permitted to act as "Monitoring Agency", many
companies have shown interest in appointing our Bank as Monitoring Agency though they are
not offering us any other role in their issue. Bank can act as monitoring agency provided bank is
banker to the issuer. SEBI being the regulator for the Monitoring Agency assignments, the
assignment of Monitoring Agency be negotiated judiciously and preferably with the existing
clients of the Bank and try to have the proceeds of the issue parked with us. Utmost attention is
required for monitoring the proceeds, submission of statement as per SEBI guidelines to the
company reporting of defaults etc. after acceptance of the assignment.The guidelines to be
observed before accepting assignment of Monitoring Agency are given in respective circular
available in e-circular site of the Bank.



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CHAPTER 7 - CLASSIFICATION OF MERCHANT BANKER
Category I to carry on the activity of issue management and to act as adviser,
consultant, manager, underwriter, portfolio manager.
Category II - to act as adviser, consultant, co-manager, underwriter, portfolio manager.
Category III - to act as underwriter, adviser or consultant only.
Category IV to act only as adviser or consultant to an issue of capital.
The minimum net worth requirement for acting as merchant banker is given below:
Category I Rs. 5crores
Category II Rs, 50lakhs
Category III Rs. 20lakhs
Category IV Nil
CODE OF CONDUCT
Should make all efforts to protect the interest of investors.
Should maintain high standards of integrity, dignity and fairness in conduct of business.
Should fulfill all obligations in a professional and ethical manner.
Should not discriminate among the clients.
Should ensure that prospectus/letter of offer 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 legal proceedings initiated against it.
Should abide by the rules of SEBI, 2003.
Should ensure that any person it employs should have the capacity to be a merchant
banker.
Should not create false market.


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OBLIGATIONS AND RESPONSIBILITIES
Merchant banker not to associate with any business other than that of the securities
market.
Maintenance of book of accounts, records, etc. Every merchant banker shall keep and
maintain the following books of accounts, records and documents namely:
a. a copy of balance sheet at the end of each accounting period
b. A copy of profit and loss account for that period
c. A copy of auditors report on the accounts of that period
d. a statement of financial position
Submission of half-yearly results.
Report on steps taken on auditors report.
Acquisition of shares prohibited.
Information to the Board.
Disclosure to the Board.
PRE- ISSUE OBLIGATION
1. Documents to be submitted- The lead manager shall submit following documents to
SEBI:
MOU between merchant banker and issuer company.
Due diligence certificate by lead merchant banker.
Certificate signed by the company secretary or company accountant in case of
listed companies making further issue of capital.
A list of persons who constitute the promoters group and their individual
shareholdings.
Draft prospectus in computer floppy in prescribed format.
Ten copies of draft offer document.
The issuer shall submit an undertaking to the Board within 24 hours of the
transaction.
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2. Appointment of Intermediaries- In case a public or rights issue is managed by more than
one merchant banker, the rights obligations and responsibilities of each merchant banker shall be
demarcated as specified in Schedule II. Other intermediaries such as advisor, bankers to the
issue, registrar, underwriters etc. shall be appointed in consultation with lead merchant banker.
3. Underwriting- Underwriting of public issue is not mandatory. However, if an issue is
underwritten, the unsubscribed portion has to purchased by the underwriters.
4. Offer documents to be made public- The draft offer document filed with the Board shall be
made public for a period of 21 days from the date of filing the offer document. The lead
merchant banker shall also fill the draft offer document with the stock exchange where the
securities are proposed to be listed and make it available to the public.
5. Appointment of compliance officer- An issuer company shall appoint a compliance officer
who have direct link with the Board with regard to compliance with various laws, rules,
regulations and other directives issued by the Board.
6. Mandatory Collection centers- The minimum number of collection centers for issue of
capital shall be (a) four metropolitan cities situated at Mumbai, Delhi, Calcutta and Chennai; (b)
all such centers where the stock exchanges are located in the region in which registered office of
the company is situated.
7. Final offer document- The lead manager shall certify that all amendments, suggestions or
observation made by SEBI have been carried out. He has to furnish a new due diligence
certificate. Final prospectus is to be submitted with Registrar of Companies and the offer
document with regional stock exchange. A computer floppy of final prospectus offer shall be
submitted to SEBI.
8. Application forms- Application form must be accompanied by abridged prospectus.
Disclaimer clause of SEBI should be printed in bold. Highlights and risk factor should be given
same prominence. The form shall contain provision for mentioning name and address of bank
and account number of the applicant.
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9. Minimum application amount- Minimum application money to be paid along with
application shall not be less than 25% of issue price. Application for shares or debentures should
be for such a number that the total amount payable is not less than Rs.2000.
10. Listing of securities- The securities offered to public shall be listed in a stock exchange. In
case these are not listed, entire application money becomes refundable.
11. Period of subscription- Subscription for public issues shall be kept open at least 3 working
days and not more than 10 working days. In case of an infrastructure company, it may be kept
open for 21 working days. Rights issue shall be kept open for atleast30 days and not more than
60 days.
12. Oversubscription- The quantum of issue through a rights or a public issue, shall not exceed
the amount specified in the prospectus of offer, however an oversubscription to the extent of
10% of the net offer to public is permissible.
POST-ISSUE OBLIGATION
Redressal of Investor The post-issue lead merchant banker shall actively associate himself
with post-issue activities namely allotment, refund and despatch and shall regularly monitor
redressal of investor.
Co-ordination with intermediaries- The post-issue lead merchant banker shall maintain close
coordination with the Registrars to the Issue. Any act of omission or commission on the part of
intermediaries shall be reported to the Board.
Stock Invest- The lead merchant banker shall ensure compliance with the instruction issued by
the RBI on handling of stock invest by any person including registrar.
Underwriters
The lead merchant banker shall satisfy himself that the issue is fully subscribed before
announcing closure of the issue.
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The lead merchant banker shall ensure that the underwriters honour their commitment
within 60 days from the date of closure of the issue.
The lead merchant banker shall furnish information in respect of underwriters who failed
to meet their underwriting developments.
Bankers to an issue- The post-issue lead merchant banker shall ensure that moneys received
pursuant to the issue are kept in a separate bank (i.e Bankers to an Issue)
Post-issue Advertisement- Post- issue lead merchant banker shall ensure that in all issues,
advertisement giving details relating to oversubscription, basis on allotment, number, value and
percentage of application received etc. is released within 10 days.
Basis of Allotment- The lead merchant banker and the registrar to an issue, shall ensure that
allotments are made in prescribed manner.
Compliance with Guidelines on Advertisement- The lead merchant banker shall ensure
compliance with guidelines on advertisement by the issuer company.















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CHAPTER 8 - MODERN MERCHANT BANKING AND EXAMPLES

During the 20th century, however, European merchant banks expanded their services. They
became increasingly involved in the actual running of the business for which the transaction was
conducted. Today, merchant banks actually own and run businesses for their own account, and
that of others. Since the 18th century, the term merchant banker has, therefore, been considerably
broadened to include a composite of modern day skills. These skills include those inherent in an
entrepreneur, a management advisor, a commercial and/or investment banker plus that of a
transaction broker. Today a merchant banker is who has the ability to merchandise -- that is,
create or expands a need -- and fulfill capital requirements. The modern European merchant
bank, in many ways, reflects the early activities and breadth of services of the colonial trading
companies.
Most companies that come to a U.S. merchant bank are looking to increase their financial
stability or satisfy a particular, immediate capital need. Professional merchant bankers must
have: 1) an understanding of the product, its industry and operational management; 2) an ability
to raise capital which might or might not be one's own (originally merchant bankers supplied
their own capital and thereby took an equity interest in the transaction); 3) and most importantly,
effective skills in concluding a transaction - the actual sale of the product and the collection of
profit. Some people might question whether or not there are many individuals or organizations
that have the abilities to fulfill all three areas of expertise.







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EXAMPLE:-

MERCHANT BANKING SERVICES
INTRODUCTION
Canara Bank is also one of the leading Merchant Bankers in India,
offeringspecialized services to Banks, PSUs, State owned Corporations, LocalStatutory bodies a
nd corporate sector. Its SEBI registered Category I Merchant Banker / Underwriter to carry
onIssue 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
Capital Market" related assignments. They undertake "project appraisals" with resource raising
plans from CapitalMarket/ Debt Markets and facilitate tie ups with Banks / Financial
Institutions and Potential Investors.
Their uniqueness is extending services under single window conceptcovering the following
areas:
1. Merchant Banking
2. Commercial Banking
3. Investments
4. Bankers to Issue - Escrow Banker
5. Underwriting
6. Loan Syndication
As leading Merchant Bankers in India, they have associated with
issuesranging 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 retail & HNIs.

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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
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



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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 businessmodel that is
sustainable;
2. Proven management team;
3. If not already profitable, visibility to profitability within a 12-month period;
4. Having established business partnerships that give it a major position in amarket 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
SBIsMerchant Banki ng Gr oup i s s t r ongl y pos i t i oned t o of f er per f ect 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:
Commercial loans
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34

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. SBIs 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 corporate.







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CHAPTER 9 - CURRENT AFFAIRS
RBI allows cash withdrawal from merchant banker terminals
Besides ATMs, customers can now also withdraw cash up to Rs1000
fromterminals at different merchant establishments, the Reserve Bank. As afurther 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
atAutomatic Teller Machines (ATMs) with the number of ATMs in thecountry at 44,857. There
are 4,70,237 POS terminals in the country.This facility may be made available at any merchant e
stablishmentdesignated 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 in1997 and formalized in
1999. The JV had investment banking operations
Morgan Stanley makes i-banking comeback
The joint venture between JM Financial and Morgan Stanley was inked in1997 and formalized in
1999. The JV had investment banking operations 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 wereengaged 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-
enteredinvestment banking business on its own, after parting ways with JMFinancial its
former Indian partner.
MERCHANT BANKING

36


PNB aims profit of 7,500crore by 2013
The country's second largest public sector lender Punjab
NationalBank aimsto double its profit to Rs7500 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 ManagingDirector 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 a
ndmerchant banking services and would be operational in the next threemonths. Currently, these
operations are run by a division of the bank.
ICICI Bank to oversee mergers and acquisitions
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 MadhabiPuri 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.




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CHAPTER 10 - CONCLUSION:
Banking systems have been with us for as long as people have been using money. Banks and
other financial institutions provide security for individuals, businesses and governments, alike.
Let's recap in short what we understand from above. In general, what banks do is pretty easy to
figure out. For the average person banks accept deposits, make loans, provide a safe place for
money and valuables, and act as payment agents between merchants and banks.

Banks are quite important to the economy and are involved in such economic activities as issuing
money, settling payments, credit intermediation, maturity transformation and money creation in
the form of fractional reserve banking. To make money, banks use deposits and whole sale
deposits, share equity and fees and interest from debt, loans and consumer lending, such as credit
cards and bank fees. In addition to fees and loans, banks are also involved in various other types
of lending and operations including, buy/hold securities, non-interest income, insurance and
leasing and payment treasury services. History has proven banks to be vulnerable to many risks,
however, including credit, liquidity, market, operating, interesting rate and legal risks. Many
global crises have been the result of such vulnerabilities and this has led to the strict regulation of
state and national banks
However, other financial institutions exist that are not restricted by such regulations. Such
institutions include: savings and loans, credit unions, investment and merchant banks, shadow
banks, Islamic banks and industrial banks.






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CHAPTER 11 - WEBLIOGRAPHY
1. http://www.indianmba.com/Faculty_Column/FC378/fc378.html
2. http://www.seminarsonly.com/Engineering-Projects/Finance/Merchant-Banking-in-
India.php
3. http://www.mbaknol.com/business-finance/introduction-to-merchant-banking/
4. http://www.newagepublishers.com/samplechapter/000490.pdf
5. http://www.scribd.com/doc/27066889/25/Qualities-of-a-Good-Merchant-Banker
6. http://myinvestorgenie.com/tag/what-are-the-functions-of-merchant-banking/