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,nd

========~~~ CJIAPTER---. f ac
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FINANCIAL SERVI CES of

lik,
rel

· op
INTRODUCTIO N:
d ends on its well organised and efficie m,
Economic development of any country ep . . . nt
. . O ft· ncial market, fmanc1al mstitutio CH
financial syste m . Financial system consists ma . ns,
nd effectiveness of financial
fi nancial instruments and financial services. The efficiency a
n
system depends on availability of strong and innovative fina cial services. The primary as
rd rec
function of financial system is to mobilise the un-tapped small savings towa s productive
investments. Upto 1990, the financial services industry in India was dominated by
commercial banks and few developmental banks:_It was so because our economy was in
characterised by excessive control over intere~ ·rates, pricing of securities, foreign se1

exchange, non-availability of innovative financial instruments, latest financial information,

absence of developed securities market and credit rating agencies. These shortcomings pri
th1
w ere making our economy paralysed. But after 1990, India adopteda globalised, liberalised
and privatised policy of economic development in a phased manner. As a result, our
fi nancial system opened up and most of the restrictions were removed with financial fi n
in n ovations and services. At present, our financial market is a developed one and m;
characterised by financial innovations and creativity. Considering the importance of
fi nancial services, let us know the concept of financial services and its role in the economic ca
d evelopment. su

M EANING AND DEFINITIONS:

va
There are two groups of people i.e. those who have surplus of funds and those who nc
have th e need of funds . Financial services involve those channe Is that facilitate mateh"mg
 29
1-'irianrrnl Sennrcs
on man's point of view,
the above two sroups I.e. savers ond U!,Crs of funds. Form a comm
cters. Finan cial servic es
m, ancial services Includ e all those nctlvl tlcs of flnonclol chara
which interm ediate and
indust ry moy be defined as "the collec tlon and organ isatio ns
invest ors result ing from
fJcllltatc flnJnclal transactions of Individuals and Institu tional
ial se rvi ces can also be
their resource allocation activities throu gh time." The financ
into investmen ts for
considered as financial interm edlati ons that mobilise the saving
industrial and household requirements.
cted with the sale
It can be defined as "activities, benefits and satisfactions, conne
" - Shashi K Gupta
of money that offer to users and customers, financial related value
d by institutions
Financial services can be defined as the products and services offere
transactions and other
like banks of various kinds for the facilitation of various financial
credit cards, investment
related activities in the world of finance like loans, insurance,
ation on the stock
opportunities and money management as well as providing inform
t market and other issues like market trends. - The Finance Act, 1994

CHARACTERISTICS OF FINANCIAL SERVICES:

by customers
1. Customer Dominated: Financial services are prima rily dominated
be provided to meet his
I as the customer is the king in the market and services should
ation.
requirements. This can be satisfied with financial creativity and innov
t be reproduced
2. lntangibility:lt is intang ibility in nature as the same service canno
' in the same manner again and can t not be standardised. To
1
be unique, the financial
, etc.
service sector needs good reputation, corporate image, brand name
ce of services
3. Simultaneous performance: It requires simultaneous performan
intermediaries to meet
providers and receivers. There should be well designed financial
the demand and supply of financial services.
e intensive. As all
4. Human Elements: It is dominated by human elements or peopl
comp etent persons for
financial services are not homogenised, it requires skilled and
marketing it.
not served today
5. Perishability:lt is perishable in nature as the financial services
brium of demand and
can't be restored for tomorrow. There is need for making equili
supply of financial services.
fluctuates due to
6. Fluctuation in Demand: The demand for financial products
tions of the society,
various reasons like disposable income of people, economic condi
nature of services, level of income, etc.
-
========== CHAPTER-<

MERCHANT BANKING

INTRODUCTION :
th
The origin of merchant banking can be traced back to 13th century Italy and 17
century France. There were some rich firms or traders who used to act as bankers to the
King of European States and Coastal Trade in addition to their own business. They used to
charge high interest and bear high risk and as a result, had to suffer heavy losses at times.
Later they were known as commission agents and financed overseas trade at higher
interest. After the Industrial Revolution in England, those merchants involved more in
international trade and earned huge profit and good reputation. They also accepted bills
of the lesser reputed traders for guaranteeing the holders to receive the full payment on
due date. Subsequently, the merchant bankers assisted the government of underdeveloped
countries in London to raise long term funds through issue of bonds in the money market.
In 1914, these merchants formed an association known as 'Merchant Banking and
Securities House Association'. Thereafter the activities of merchant bankers were expanded
and incorporated a number of financial services. In India, merchant banking service is a
relatively new concept and it was started only in 1967 by National Grind lays Bank followed
by Citi Bank in 1970.
/
,_ /MEANING AND DEFINITIONS:
The concept of merchant banking has different connotations in different countries.
In London, merchant bankers are those who are members of British Merchant Banking
and Securities House Association and carry on certain specific financial activities. In
America, merchant banking is concerned with mobilising the savings of people and
directing the funds to business enterprises. In the UK, it refers to the 'accepting and issuing
houses' and in the USA, it refers to the 'investment banking'.The merchant banking may
r ◄
2
Merchant Banking & Financial Servicea

be defined as 'an Institution which covers a wide range of activities such as management
of customer services, portfolio management, credit syndication, acceptance credit
I
counselling, insurance, etc.'

Securities and Exchanges Board of India (Merchant Bankers) Rules, 1992- A

merchant banker has been defined as any person who Is engaged In the business of issue
management either by making arrangements regarding selling, buying or subscribing to
securities or acting as manager, consultant, adviser or rendering corporate advisory services
in relation to such issue management.
Random House Dictionary -Merchant banker is an organization that underwrites
securities for corporations, advises such clients on mergers and is involved in the ownership
of commercial ventures. These organizations are sometimes banks which are not merchants
and sometimes merchants who are not banks and sometimes houses which are neither
merchants nor banks.

Charles P. Kindleberger: Merchant banking is the development of banking from

commerce which frequently encountered a prolonged intermediate stage known in England
originally as merchant banking.
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 the securities as manager, consultant, adviser
or rendering corporate advisory service in relation to such issue management.'
OBJECTIVES OF MERCHANT BANKING:
Following are the objectives of merchant banks in India:
• To help their clients in the project management right from inception to the
commencement of the project
• To handle funds of investors at a fee and managing their portfolio
• To provide corporate advisory/counselling services in case of mergers and
amalgamation, restructuring, rehabilitation of sick units, etc.

• To render various financial services to suit the requirements of individual

business units

• To act as a sponsor of issue and ensure success in the marketing of securities

• Channelizing the financial surplus of the general public into productive

investment avenues
co-coordinating the activities of various intermediarie:, like the registrar,
•
bankers, advertising agency, printers, underwriters, brokers, etc., to the share
issue
4
Mer cha nt Ban kin g & Fin anc ial Ser vices

(I) Cor por ate counselling: The basic func

tion of a mer cha nt ban ker is corporate
cou nse lling . It refe rs to a set of acti vitie s
und erta ken to ens ure effic ient func tion ing
corp ora te ente rpri se thro ugh effe ctiv e fina of a
ncia l man age men t. The scope of corporat
cou nse lling is limi ted to givi ng suggestion e
s and opin ions to the clie nt and help taki
acti ons to solv e the ir pro blem s. A mer ng
cha nt ban ker guid es the clie nt on aspects
orga niza tion al goa ls, voc atio nal fact ors, of
orga niza tion size, cho ice of pro duc t, dem
fore cas ting , cos t ana lysis , allo cati on of and
resources, inve stm ent dec isio ns, cap ital
and
exp end itur e man age men t, mar keti ng stra
tegy, pric ing met hod s etc. It is prov ided
corp ora te uni t with a view to ens ure bett to a
er perf orm anc e, mai ntai n stea dy gro wth
crea te bet ter ima ge amo ng investors. The and
follo win g acti vitie s com e with in the pur view
corp ora te cou nse lling : of

• Pro vidi ng guid anc e in areas of dive rsifi cati

on based on the Gov ernm ent' s
eco nom ic and lice nsin g policies.
• Und erta king appraisal of prod uct lines, ana
lysing the ir gro wth and pro fitab ility
and fore cas ting futu re tren ds.
• Rej uve nati ng old- line com pan ies and ailin
g sick unit s by app rais ing the ir
tech nolo gy and process, assessing the ir requ
irem ents and rest ruct urin g thei r
cap ital base.
• Ass ess men t of the revival prospects and
plan ning for reha bilit atio n thro ugh
mo der niza tion and dive rsifi cati on and
reva mpi ng of the fina ncia l and
orga niza tion al stru ctur e.
• Arra ngin g for the approval of the financia
l inst ituti ons /ban ks for schemes of
reh abil itati on invo lvin g fina ncia l relief, etc.
• Exp lorin g pos sibi litie s for take ove r of sick
unit s and prov idin g assistance in
ma king con seq uen tial arra nge men ts
and neg otia tion s with fina ncia l
inst ituti ons /ban ks and othe r inte rest s/au thor
ities invo lved .
• Ass istin g in obta inin g app rova ls from Boa
rd for Indu stria l and Fina ncia l
Rec ons truc tion (BIFR) and othe r authorities
und er the Sick Indu stria l Companies
(spe cial prov isio ns) Act, 198 5 {SICA).
• Mon itor ing imp lem enta tion of schemes of
reha bilit atio n.
• Adv ice on rear rang ing the port folio of busi
ness assets thro ugh acq uisi tion etc.
• Ass istin g in valu ing the assets and liabilitie
s.
• Des igni ng the tran sac tion to reap the max
imu m tax advantages. Acti ng as an
age nt for leve rage d buy out (LBO) involvin
g heavy use of borr owe d funds to
purc has e a com pan y or divi sion of a compan
y.
-
M,.. ,cJtcmt Bankmq.i__ ~ - - - - ~ - - - - - - - - - - - - - - ~ 5
• Facilitating Managemen t Buy ou ts (MBO) i.e. selling a part of busi ness to t heir
own managers by a company.
• Evolving M anagement Information System.
In India corporate advisory has a good potential. The Indian industry is going through
an unpreceden ted churning, bracing itself for global competition. Companies in turn, have
been dropping divisions as they struggle to become fit to survive in the new environmen t.
Free pricing of issues and the opportunity to tap the internationa l market through the
Euro-issue route has greatly enhanced the need for expert advisory services.
\. (ii) Project counselling: The first step to launch a business unit is selection of a
viable project. Merchant bankers undertake this assignment on a very large scale since
they have experts with them in diverse fields. Project counselling covers a variety of sub
assignments which includes the study of the project, offering advisory services on the
viability and procedural aspects for its implementation. It involves the following activities:
• Identificatio n of potential investment avenues.
• Providing advice on procedural aspects of project implementa tion.
• Guidance in relation to project viability i.e. project identificati on and
counselling. It may be for setting up new units, expansion or improveme nt of
existing facilities.
• Conducting review of technical feasibility of the project on the basis of the
report prepared by own experts or by outside consultants.
• Assisting in the preparation of project report from a financial angle, and advising
and acting on various procedural steps including obtaining government consents
for implementa tion of the project.
• Assisting in obtaining approvals/l icenses/per missions/gr ants, etc from
governmen t agencies in the form of letter of intent, industrial license, DGTD
registration, and government approval for foreign collaboration.
• Arranging and negotiating foreign collaborations, amalgamations, mergers, and
takeovers.
• Providing assistance in the preparation of project profiles and feasibility studies
based onprelimina ry project ideas, covering the technical, financial and
economic aspects of the project from the point of view of their accept ance by
financial institutions and banks.
• Organisation and management set up for a strong base and efficient working
of the project.
 &
-=-- - - - - - - - - - - - - ~Me-rch ant Ba nki ng & Fin an cia l S e rt11·e
- - - - -~ -- -- -- .: .: ea
(iU) Loan syndication: Every project wh
eth er new or old, needs deb t funds
its rrl'e diu m ter m financial requireme to meet
nts. In big projects, the am oun t of loa
is substantial. In tha t case a single n requirement
financial Ins titu tion may not be abl
e to finance the
ent ire am oun t or bea r high cre dit risk
. There is need for someone to arra
fro m mo re than one financer. The me nge deb t funds
rchant banker by rendering cre dit syn
saves the tim e of the borrower. Cre dication services
dit Syndication refers to obt ain ing of
loans fro m single
dev elo pm ent finance ins titu tion or
a syndicate or con sor tium . Me rch
ant Banks help
corporate clients to raise syndicated
loans fro m commercials banks. Som
e of the important
cre dit syndication services offe red
are:
• Estimating the tota l cost of the pro
jec t to be und erta ken .
• Appraisal of the pro jec t to satisfy tha
t it is via ble and ens urin g adherence
to
the guidelines for financing ind ust rial
projects
• Facilitating the loan applications to
be submitted to financial ins titu tion
s and
banks

• Mo nito ring the sanction of funds wh

ile acting as a specialised liaison age
ncy.
• ~Ne got iati ng the ter m of assistance
on beh alf of clie nt .
Post-sanction form alit ies wit h these
ins titu tion s and banks.
• Assistance in dra wl of ter m loans and
/or bridging loans.
• Assessing wo rkin g capital requireme
nts and arranging it .
(iv) Issue ma nag em ent : Issue ma
nagement is considered to be the
fun ctio n of me rch ant banks in Ind trad itio nal
ia. Raising fun ds thro ugh equ ity or
deb ent ure inv olv e a num ber of form pre fere nce or
alities and legal procedures. Corporate
no t hav e spe cia list s to han dle all houses may
the se issues. Me rch ant bankers act
inte rme dia ries . The sec urit y issue fun as fina nci al
ctio n may be broadly classified into
pre -iss ue ma nag em ent and post-iss two phases i.e.
ue management. The pre-issue ma nag
the foll ow ing fun ctio ns: em ent involves

(a) Public issue through prospectu

s: To bring out a public issue, me rch ant
have to coo rdin ate the activities rela bankers
ting to issue wit h diff ere nt gov ern me
bod ies , professionals and private nt and pub lic
agencies. First the prospectus should
cop ies of con sen t of experts, legal be dra fted . The
advisors, attorneys, solicitors, banker
the issue, brokers and und erw rite s, and bankers to
rs are to be obtained fro m the com
issue. These copies are to be file d alo pany making the
ng wit h the prospectus to the Registr
Aft er the prospectus is ready, it has ar of Companies.
to be sent to the SEBI for clearance.
It is onl y afte r
 8 n,, ,1 1,,11,t 1f1111 ld 11 t1 /fl. /•1n nrv:,,,1 t ,(•r
111,.,,._
(v)
Undc rwrlt lns of publl t ,~,1110 1 11 11>1 II 11 1111 Int I hi wlil< Ii rm·rchan1
bnnkcr 81
an ossur ancc to the l•,•111lnH I l lll\JHII I\I l o 1n1II'•' 111 11 ' 10 11111
,.,,rur ttl fl!".i In c;i'.lc of r/''
subsc ript ion or undc r-•mb sc:rlpl 1011 of -.m '" lllil'• hV I hu purno11,,
The llabll lty of merc hant bnnko r nrl•ioN If tho lm,uo I&,,ol fully oub:;c
to w hom It Wos off~r::·
.rl bed and this llabiu~
Is restri cted to the comm ltmon t oxt ondurl l>y 111111. 'fho merc
hant bankers undertak1t1
unde rwriti ng make effor ts on their own lo lnrluco tho pror:p octlvc
Inves tors to subscrib8
to the conc erned Issue. Follow lns oro tho functions porfo rmcd
by merchant bankers ~
unde rwriti ng contr act: I

• Selection of instit ution al and broker undor wrltc r9 for 5Ynd icating/
underwriting
arran geme nts
• Obta ining the approval of Institu tional unde rwrite rs and st0 ck
exchanges for
publi catio n of the prosp ectus
• Co-o rdina tion with the unde rwriters, brokers and bankers to the
issue
.JY)" Portf olio management: Investment In single asset will resul
t in maximisation
of retur n, liquid ity and safety. Maximization of wealth can be
achieved by investing in
portf olio assets depe nding upon the nature, risk bearing capac
ity, requi reme nt of funds
of the investor. Inves tmen t in portfo lio requires more professiona
l and technical knowledge.
Merc hant bankers as a body of professionally qualified persons also
undertake assignments
of mana ging an indivi dual investor's portfo lio and corporate
portf olio.They study the
mone tary and fiscal policies of the government. They study the
financial statements of
comp anies in which the investments have to be made by inves
tors. They also keep a close
watc h on the price movemen~s in the stock market. The follow
ing are funct ions rendered
by merc hant bankers:
• Unde rtakin g inves tmen t in securities.
• Colle ction of return on investment and re-investment of the same
in profitable
aven ues, inves tmen t advisory services to -the investors and
other related
services.
• Provi ding advice on selection of investments.
• Carry ing out a critical evaluation of investment portfo lio.
• Securing appro val from RBI for the purchase/sale of securities (for
NRI clients).
• Colle cting and remit ting interest and dividend on inves tmen t.
• ~ vidi ng tax counselling and filing tax returns throu gh tax consu
ltants.
(yi1f Merg er and acquisition: A merger is a combination of two or
more companies
into a singl e comp any wher e one survives and others lose their
corpo rate existence. A
-
Mcrr hant Ban king 9
takeover refers to the purchase by one company acquiring contr olling
Interest In the share
capital of anoth er existin g comp any. Merch ant bankers are t he
middl emen in setting
negot iation between the offeree and offeror. Being professiona
l exper ts they are apt to
safeguard the interest of the shareholders in both the companies.
Once the merge r partn er
is proposed, the merchant banker appraises merger/takeover propo
sal with respect to
financial viability and technical feasibility. He negotiates purchase
consideration and mode
of payment. He gets approval from the government/RBI, drafts schem
e of amalgamation
and obtains approval from financial institu tions.
(viii) Foreign currency financing: The financ e provi ded to
fund foreig n trade
transactions is called 'Foreign Currency Finance'. The provision of
foreign currency finance
takes the form of export impo rt trade finance, euro currency loans,
Indian joint ventures
abroad and foreign collaborations.
The main areas covered by this type of merchant activi ty are as
follows:
• Providing assistance for carrying out the study of turnk ey and
const ructio n
contract projects.
• Arranging for the syndication of various types of guarantees, letter
s of credit,
pre-shipment credit, deferred post-shipment credit, bridge loans
, and other
credit facilities.
• Providing assistance in opening and operating bank accounts abroa
d.
• Arranging foreign currency loans under buyer's credit scheme
for impo rting
goods.
• Arranging deferred payment guarantees unde r supplier's credi
t scheme for
impor ting capital goods.
• Providing assistance in obtaining export credit facilities from the
EXIM bank
for expor t of capital goods, and arranging for the necessary
gove rnme nt
approvals and clearance.
• Undertaking negotiations for deferred payment, export finance, buyer
's credits,
documentary credits, and other foreign exchange services like packi
ng credi t,
etc.
ix) Working capital finance: The finance required for meet ing
the day-to-day
expenses of an enterprise is know n as 'Work ing Capital Finan
ce'. Merc hant bankers
undertake the following activities as part of provid ing this type
of finance:
(a) Assessment of worki ng capital requi reme nts.
(b) Preparing the necessary appli catio n to nego tiatio ns for
the sanct ion of
appropriate credit facilities.
-
Merchant Banking & Finanaal Se'lllcea
10
- hant bankers who have requ·1 1
t k s te
(>e) Stock broking and dealership: The mere k .
t as share bro ers on a s oc excha 11
professiona l knowledge and experience may aIso ac . h. . . Re
a"' j even as dealers for Over the Counter trading. To venture int~ t is _area it is nornia11y
nd
d ~slred that the merchant banker has reasonable network. Their actions a activities
d stock exchange. They are libe
at
are reg, •lated by rules and regulations of the concerne . . rty
th eir operations. They
to appoint sub-brokers and sub-dealers to ensure wider network of
1ndia th e merchant bankers
can be brokers for inland as well as foreign stock exchanges. In
nd Sub-brokers) Rules
who desire to act as brokers are regulated by SEBI (Stock Broker a
1992.
'\.!,xi) Joint venture abroad: Depending on economic a
nd political considerations
many countries may permit joint ventures by local businessmen abroad. Here again
merchant bankers can play a decisive role. They facilitate meeting of foreign partner, get
sanctions under various provisions, make tech no-economic surveys, legal documentations
under local as well as foreign legal provisions etc.
(xii) Debenture trusteeship: The merchant bankers can get themselves registered
to act as trustees. These trustees are to protect the interests of debenture holders as per
the terms laid down in trust deed. They are, as trustees, to undertake redressal of
grievances of debenture holders. They are to ensure that refund moneys are paid and
debenture certificates are dispatched in accordance with the Companies Act. Debenture
trustees are expected to observe high standards of integrity and fairness in discharging
their functions. They can call for periodical reports from the body corporate. They charge
fee for such services.
(xiii) Bought out deals: 'Bought out deals' is a process in which the merchant banker
or bankers may invest funds in equity shares of a company when promoter foresees that
public issue is not to be materialised. Merchant bankers (bought out dealer or sponsor)
keep the shares of company initially with them which are offered to public at a later stage
or at a favourable time on 'over the counter' or other stock exchanges.
/
(xiv) Lease financing and hire purchase: The fixed assets in a corporate house may
be obtained by direct purchasing or hire purchasing or leasing. Sometimes , merchant
banks also solve that problem by suggesting merits and shortcomings of different modes
of acquiring assets. It may also act as a lessor or seller in of hire purchase of assets. Lease
is an agreemen t whereby the lessor (merchant banker in our case) conveys to the lessee
(the user), in return for rent, the right to use an asset for an agreed period of time. on the
other hand, in hire purchase, the user at the ehd of the agreed period has an option to
purchase the asset which he has used till date. The client can also depend on merchant
banker for acquiring the needed asset and complying with all formalities.
 Mcrdumt Hm1kmr,!.....c.~ - - ~ - - ~ - - - - - - . . . . c = - - - ~ ~ - - -1
~1~
(xv) Factoring: Factoring Is a specialised service provided by the merchant bankers
wh; re they discount the debtors of the corporate cl lent before their due dates for certain
commission. Merchant bankers maintain the debtors' accounts and collect the money as
and when they become due. The merchant bankers render the following roles:
• Maintain the books of accounts pertaining to credit sales
• Make a systematic analysis of relevant information for credit monitoring and
control.
• Provide full or partial protection against bad debts and accepting the risk of
non -realization.
• Provide financial assistance to the client.
• Provide information about prospective buyers.
• Provide financial counselling and assist in managing the liquidity.
MERCHANT BANKING VS. COMMERCIAL BANKING :
Basis of Differences Merchant Banking Commercial Banking
Meaning A merchant bank is a financial
Commercial banks cater to the
institution that provides general public and provide
capital to companies in the services such as accepting
form of share ownership deposits, providing loans and
instead of loans. other basic investment products
It provides Non-fund based It provides Fund-based services
Primary Services Financial advisory services like accepting deposits, lending
particularly in facilitating money, grants loans & advances
mergers and acquisitions, etc.
corporate restructuring and
private equity placements.
It also renders some While underwriting is never
Secondary Services secondary services like undertaken, it provides some
underwriting and broker- secondary services like safe
dealer operations. deposit vault, insurance and
broking services.

The target group of merchant Commercial banking gives more

Target Group
banking services includes emphasis on retail customers
corporates and high net compared to corporate clientele.
worth individuals.
12 Merchant Banking & Financial Services

Access
It has access to limited lthasaccesstoawide rclientele.-
clientele.
Nature of Merchant banks raise Commercial banks raise finances
Instruments finances with equity and debt only with debt instruments.
instruments.
The source of risk is from the The risk prone from defaulting
Risk regulators who have been borrowers.
becoming more stringent
with the passage of time.
Impact of Activities The impact is usually related It has limited impact.
to the growth of financial
markets and liquidity of
money markets.
Focus of Activity The activities in merchant In case of commercial banking,
banking are mainly activities are mainly asset
management oriented which oriented like credit proposals,
includes capital restructuring, loan sanctions, etc.
underwriting, portfolio
management, etc.
Regulator The regulator of merchant The regulator of commercial
_ banks is SEBI. banks is Ministry of Finance/RBI.
 NT BANKING:
SEBI REGULAITONS RELATING TO MERCHA
.,
A. REGISTRATION OF MERCHANT BANKERS
te of reg istra tion sha ll be made to
1. An app lica tion by a person for grant of a cert ifica
the Board in Form A.
omp anie d by a non -ref und able
2. An app lica tion for regi stra tion shall be acc
app lica tion fee as specified in regulation-12.
follo win g cate gori es of the merchant
3. The app lica tion shall be made for any one of the
banker, nam ely:
the issue man age men t, which will,
(a) Cat ego ry I: (i) to carry on any acti vity of
and oth er info rma tion relating
inte r alia , consist of preparation of prospectus
tie up of fina ncie rs and final
to the issue, dete rmin ing financial stru ctur e,
(ii) to act as adviser, consultant,
allo tme nt and refu nd of the subscriptions; and
man age r, und erw riter , port folio manager;
sultant, co-m ana ger, underwriter,
(b) Cat ego ry II, tha t is to act as adviser, con
por tfol io manager;
adviser, con sult ant to an issue;
(c) Cat ego ry Ill, tha t is to act as underwriter,
or con sult ant to an issue.
(d) Cat ego ry IV, tha t is to act only as adviser
ects and does not con form to the
4. Any app lica tion , whi ch is not complete in all resp
cted prov ided tha t, befo re rejecting
inst ruct ions spe cifie d in the form shall be reje
 15
Merc hant Bon k mr,
rtuni ty to remo ve wit hin
any such appll catlo n, t he appli cant shall be given an oppo
by the Board .
the time speci fied such objections as m ay be Indica ted
Infor matio n or clarlf l catio n
s. The Board may requi re the appli cant to furnis h furth er
bank er for the purpose of
regarding matte rs relev ant to the activ ity of a merc hant
office r shall, If so requ ired,
disposal of the appli catio n. The appli cant or its princ ipal
appe ar befor e the Board for personal repre senta tion.
of a certif icate , all matte rs
6. The Board shall take into acco unt for considering the grant
bank er and in partic ular,
which are relev ant to the activi ties relati ng to merc hant
name ly:
the appli cant comp lies with the follow ing requi reme nts,
non-b ankin g finan cial
(a) the appli cant shall be a body corpo rate othe r than a
the Reserve Bank of
comp any as defin ed unde r clause (f) of secti on 45-1 of
:
India Act,1 934 (2of1934), as amen ded from time to time
persons who have the
(b) the appli cant has in his empl oyme nt minim um of two
expe rienc e to cond uct the business of merc hant banker;
cant has not been
(c) a perso n direc tly or indire ctly conn ected with the appli
grant ed regis tratio n by the Board.
fied in regul ation 7;
(d) The appli cant fulfils the capital adequacy requi reme nts speci
is not invol ved in any
(e) The appli cant, his partn er, direc tor or princ ipal office r
an adverse beari ng
litiga tion connected with the securities mark et which has
on the business of the appli cant;
not at any time been
(f) The appli cant, his director, partn er or princ ipal office r has
been found guilty of
convicted for any offen ce invol ving mora l turpi tude or has
any econ omic offen ce;
instit ution recog nised
(g) The appli cant has the professional quali ficati on from an
nt;
by the Governme11t in finance, law or business mana geme
st of inves tors.
(h) Gran t of certif icate to the appli cant is in the intere
of regul ation 6 shall be
7. The capital adequacy requirement refer red to in clause (d)
h" mean s the sum of paid-
a net wort h of not less than five crore rupees. "Net wort
of maki ng appli catio n.
up capital and free reserves of the appli cant at the time
Category Minimum Amount

Cate gory - I Rs.5,00, 00, 000

Cate gory - II Rs. 50,00 ,000

Cate gory - Ill Rs.20, 00,00 0

Cate gory - IV Nil.

 16 Mercha nt Banking & Fina ncr.al S,•rut<'C.><J

8- The Board, on being sati sfi ed that the applicant Is eligible, shall grant a certificate
of registration in Form Band shall send an intimation to the applicant. The certificate
shall be valid unless it is suspended or cancelled by the Board.
9. Conditions for Registration granted under regulation 8 shall be the following:
(a) Where the merchant banker proposes change in control, It shall obtain prior
approval of the Board for continuing to act as such after the change;
(b) it shall pay the fees for registration, in the manner provided in these regulations;
(c) it shall take adequate steps for redressal of grievances of the investors within
one month of the date of the receipt of the complaint and keep the Board
informed about the number, nature and other particulars of the complaints
received;
(d) it shall maintain capital adequacy requirements specified in regulation 7 at all
times;
(e) it shall abide by the regulations made under the Act in respect of the activities
carried on by it as merchant banker.
(f) it shall immediately intimate the Board, details of changes that have taken
place in the information that was submitted, while seeking registration.
10. Registration Fees for Merchant Bankers (Regulation-12)
(a) Every merchant banker shall pay a sum of twenty lakh rupees as registration
fee at the time of grant of certificate of registration.
(b) The fee shall be paid by the merchant banker within 15 days from the date of
receipt of intimation from the Board under sub-regulation (1) of regulation 8.
(c) A merchant banker who has been granted a certificate of registration, to keep
its registration in force, shall pay a fee of nine lakh rupees every three years
from the sixth year, from the date of grant of certificate of registration or from
the date of grant of certificate of initial registration granted prior to the
commencement of the Securities and Exchange Board of India (Change in
Conditions of Registration of Certainlntermediaries)(Amendment)Regulations,
2016, as the case may be.
8. GENERAL OBLIGATIONS AND RESPONSIBILITIES
1. No merchant banker, other than a Bank or a Public Financial Institution, who
has been granted a certificate of regi~tration under these regulations, shall
[after June 30, 1998] carry on any business other than that in the securities
market.
 '. ..

chant banker who prio r to

2· Notwithstanding anything contained above, a mer
Board of Ind la (Me rcha nt
the date of notification of the Securities and Exchange
red Into a cont ract In respect
Bankers) Amendment Regulations, 1997, has ente
market may, If he so desires,
of a business othe r than that of the securities
discharge his obligations under such contract.
lead merchant banker holding a
3. In respect of every issue to be managed, the
und erwr iting oblig ation of
certificate unde r Category I shall accept a mini mum
or rupees twen ty-fi ve lacs,
five percent of the tota l unde rwrit ing com mitm ent
t banker is unable to accept
whichever is less: provided that, if the lead merchan
mer chan t banker shall
the mini mum unde rwrit ing obligation, that lead
itten to that exte nt by a
make arrangement for having the issue und erwr
l keep the Board infor med
merchant banker associated with the issue and shal
of such arrangement.
r, partner, offic er and employee
4. It shall be the duty of every director, proprieto
to produce to the inspecting
of the merchant banker, who is being inspected,
ts in his custody or control
auth ority such books, accounts and other documen
mati on relating to his
and furnish him with the statements and infor
as the inspecting auth ority
activities as a merchant banker with in such time
may require.
g auth ority to have reasonable
5. The merchant banker shall allow the inspectin
banker or by any othe r
access to the premises occupied by such merchant
le facility for examining any
person on his behalf and also extend reasonab
in the possession of the
books, records, documents and com pute r data
provide copiesof documents
merchant banker or any such other person and also
ecting authority, are relevant
or othe r materials which, in the opinion of the insp
for the purposes of the inspection.
ection, shall be entit led to examine
6. The inspecting authority, in the course of insp
tor, partner, prop rieto r and
or record statement of any principal officer, direc
employee of the merchant banker.
r, partner, offic er or employee of
7. It shall be the duty of every director, proprieto
g auth ority all assistance in
the mer chan t banker to give to the inspectin
banker may reasonably be
connection with inspection which the merchant
expected to give.
C. RESPONSIBILITIES OF LEAD MANAGERS:
ld be managed by at leas t one
It is required unde r regulations that every issue shou
lead manager is not required if the issue
mer chan t banker acting as 'lead manager'. Such
rupees 50 lakh.
is righ t issue or the size of issue is not exceeding
 -
18 Mcrrhant Bank1na <'l, F'/nancral ScrorC<>I)
---
The merchant banker acting as lead manager must enter Into an agreement With
the concerned company. This agreement must state their mutual rights, llabllltles and
obligations relating to such issue Agre tt pertaining to particulars to disclosures
all t • emen erms ,
o ment and refund should be clearly defined, allocated and determined.
1. No lead manager shall agree to manage or be associated with any issue unless
his responsibilities relating to issue mainly, those of disclosures, allotment and
refund are clearly defined, allocated and determined and a statement specifying
such responsibilities is furnished to the Board at least one month before the
opening of the issue for subscription:
2. Provided that, where there are more than one lead merchant bankers to the
issue the responsibilities of each of such lead merchant bankers shall clearly
be demarcated and a statement specifying such responsibilities shall be
furnished to the Board at least one month before the opening of th e issue for
subscription.
3· A lead merchant banker shall not be associated with anyissue if a merchant
banker who is not holding a certificate is a~sociated with the issue.
4. A merchant banker shall not lead manage any issue or be associated with any
activity undertaken under any regulations made by the Board, ifhe is a promoter
or a director or an associate of the issuerof securities or of any person making
an offer to sell or purchase securities in terms of any regulations made by the
Board:
5. Provided that a merchant banker who is an associate of such issuer or person
may be appointed, if he is involved only in the marketing of the issue or offer.
D. MAINTENANCE OF BOOKS OF ACCOUNT, RECORDS, ETC.
1. Every merchant banker shall keep and maintain the following books of account,
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 the auditor's report on the accounts for that period;
(d) a statement of financial position.
(e) Records and documents pertaining to due diligence exercised in pre-issue and
post-issue activities of issue management and in case of takeover, buyback
and delisting of securities.
 11
\lcrt:"hnnt L~tlon g
th
banker sha ll Inti ma te to the Boa rd the plac e whe re c boo k~ of
l. Every me rcha nt
ntained.
account, records and documents are mai th nd
(1), eve ry me rch ant ban ker shall, afte r ee
Wit hou t prejudice to sub-regulation fit
h acc oun ting per iod furn I sh to the Board copies of the balance sheet, pro
of eac
ting
nts for any oth er preceding five accoun
and loss account and such oth er docume
years whe n required by the Board. n
ant ban ker shall furn ish to the Boa rd half-yearly una udi ted flna cial
4. Every merch
of
a view to mo nito r the capital adequacy
results whe n required by the Board with
the merchant banker. rd nd
pre serv e the boo ks of acc oun t and oth er reco s a
5. The merchant banker shall
4 for a min imu m per iod of five years.
documents maintained und er regulation1
ort,
months from the date of the aud itor 's rep
6. Every merchant banker shall,within two
e out in the aud itor 's rep ort.
take steps to rectify the deficiencies mad
INDIA
OVERVIEW OF MERCHANT BANKING IN
as
ies Act, 1956, managing agents act ed
Prior to the enactment of Indian Compan
orts ,
ant ban kers. They acted as issue houses for securities, evaluated pro jec t rep
merch
provided ven ture
h~ t
broking firm s also fun ctio ned as~ erc
capital for new firms etc. Few share
prim ary
ber and size of the issues made in the
bankers.With the rapid gro wth in the num eig n
the nee d for spe cial ized mer cha nt ban king service was felt . G! indlays Bank (for
market,
1970. ~_!31
k) ope ned its me rch ant ban king divi sion in 1967, f9llo wed by Citi ban k in
ban
·up a full y
in 1972 and it follo wed up by set ting
star ted its merchant banking division ks
sidi ary in 198 0, nam ely 581 Cap ital Markets Ltd. The oth er nationalized ban
owned sub ara
ncia l inst ituti ons , like IDB I, IFC l,ICI CI, Securities- and Finance Company Ltd., Can '
and fina sec tor
nk of India (801 Finance Ltd.) and priv ate
Bank (Can Bank Financial S; rvices Ltd.),-Ba
s Ltd ., DSP
l and Investment Consultancy Service
financial companies, like JM Financia
up the ir me rch ant banking divisions.
Financial Consultancy Ltd. have also set
rke t
rating in the country, the prim ary ma
Wit h ove r 1,100 merchant bankers ope
nc; in the
services have assumed gre ate r imp orta
activity is picking up. Merchant banking erning,
investor becoming mo re cautious and disc
present capital market scenario. Wit h the
ove rall
of me rch ant ban ker has gain ed mor e prominence.In India, apa rt from the
the role SEBI for
operations are closely superyised by the
control by the RBI, merchant bankers'
tection.
the ir pro per functioning and investor pro
 , .

20 - - - - - .,
merehant Banking & Finandal ~rvieca
- -....
\. STRUCTURE OF MERCHANT BANKING IN INOIA
f In l~d~a. a common organizational set up of merchant bankers to operate In the
orm of d1v1s1ons of Indian and F . b k d financial institutions, subsidiary
companies b. ore,gn an s an .
. esta hshed by bankers like SBI Canara Bank Punjab National Bank, Bank of
I nd ,a, etc so fi
. me irms are also org . d' b fi ancial ' and technica · I It
consu ants and
professio . anize y m . .
. na 1s. Secunties and Exchanges Board of lndia(SEBI) has d1v1ded the merchant
b ankers into f
our categories based on their capital adequacy. Each category ·,s auth onzed
·
t O perform C rta·
. e m functions. From the point of Organizational set up In d.,a's merehant
b ankmg orga ·
· r k
nizations can be categorized into 4 groups on the basis of th eir m age With
parent activity. They are:

~stitution al Base: Merchant banks function as an independent wing or as

~uo. id1.ary of various Private/ Central Governments/ State Governments Financial
mst1tut1ons. Most of the financial institutions in India are in public sector and therefore
such set u I . .. 1· ·
P P ays a role on the lines of governmental pnontIes and po icies.
\.. (b) Banker Base: These merchant bankers function as division/ subsidiary of banking
organization. The parent banks are either nationalized commercial banks or th e 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 operating also like providing investment and portfolio
management services.
(d) Private Base: These merchant banking firms have 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 in India has been given a specific direction by SEBI (Merchant
Bankers) Regulation. Since their role in public issue are exhaustive and their responsibilities
absolute, professional expertise is needed. Thus after SEBI, merchant bankers emerged
from all segments of the economy. It was no longer a monopoly of institutional banker.
This is shown in Chart-1.
 21

MERCH ANT DANKS

- ---- --·- - INTERN ~ i.

- ATIONA
PUBLIC SECT: ; - ] PRIVATE ~ [_~~~
COMME 'ROAL
BANKS 24)
-r-;~~ (l~)_J
RNANO AL -_ INVEST
FINANCE AND
MENT (231) _
l
INSTITU TION 6

i -;~TE INSTIT UTIO~ ~

nts:
In simple terms the merchant banking activity can be divided into four segme
iaries or
(i) Institu tions like IDBI , ICICI, IFCI floated merch ant banking subsid
divisions
City Bank
(ii) Foreign banks like Grindlays, Standard Chartered, Honkong Bank,
launched merchant banking divisions
bankin g
(iii) Nationalised banks promoted subsidiaries to carry out merch ant
activities like SBI Caps, PNB Caps, Canfina
r Trust
(iv) Private sector merchant bankers like JM, Kotak Mahindra, DSP, Maste
who were either brokers or underwriters or portfo lio managers.
:
PROFESSIONAL ETHICS & CODE OF CONDUCT FOR MERCHANT BANKERS
Bankers)
Regulation-13 of Securities and Exchange Board of India (Merc hant
ct for merchant
Regulations, 1992 states the following professional ethics and code of condu
ber 2016):
bankers in India effective from 1 October 2003 (as amended up to Decem
51

ors.
1. A merchant banker shall make all efforts to protec t the interests of invest
y and
2. A merch ant banker shall maintain high standards of integr ity, dignit
fairness in the conduct of its business.
and
3. A merch ant banker shall fulfil its obliga tions in a promp t, ethica l,
professional manner.
r care
4. A merchant banker shall at all times exercise due diligence, ensure prope
and exercise independent professional judgm ent
5. A merchant banker shall endeavour to ensure that;