Professional Documents
Culture Documents
Merchantbanki
Merchantbanki
Merchantbanki
EXECUTIVE SUMMARY
Although merchant banking activity was ushered in two decades ago, it was only in
1992 after the formation of Securities and Exchange Board of India that it is defined
and a set of rules and regulations in place. Today a merchant banker is who has the
ability to merchandise that is, create or expand a need and fulfill capital requirements.
I have given an overview about the financial markets and the role of merchant bankers
in the growth of these markets. My project covers how the merchant banks works,
rules & regulations laid by SEBI & its impact on the merchant banking activities.
Their importance in the economy is expected to grow even further in the coming years
with an increasing proportion of household savings getting invested in corporate &
other securities. Hence, my project covers the challenges and advantages, which
India will get and is getting by merchant banking activities. I have covered several
services provided by Merchant Bankers & the role of Merchant bankers in providing
those services to the business world.
Finally, the top players, which exist in merchant banking, are also covered; their
services are also been focused. To get the practical knowledge about merchant
banking activities I have interviewed visited State bank of India, Kotak mahindra
bank and SPA Merchant bankers ltd.
Merchant Banking
INDEX
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CONTENTS
Introduction
History
Definition
Evolution & Emergence of Merchant
PAGE NO.
1
2
4
5
Banking
Merchant Banking in India
Merchant banking past and present
Need & Importance in India
Role of Merchant Bankers
Merchant Bankers Commission
Commercial Banks & Merchant Baks
Growth of Merchant Banks in India
Problems of Merchant Bankers
Current Scenario
Merchant Banking Indian Scenario
Merchant Banking International
Scenario
Merchant Banking Organisation
Qualities of good Merchant Bankers
Responsibilities of Merchant banker
Registration of Merchant Banker
Scope of services
Services Rendered by Merchant
7
8
9
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14
15
16
17
19
20
22
24
26
27
Bankers
Recent Trends
Players in Merchant Banking
Merchant Banking Future
Development
Questionnaire
Annexure
Conclussion
Bibliography
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48
51
53
62
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Merchant Banking
INTRODUCTION
The term Merchant Banking has its origin in the trading methods of countries in the
late eighteenth and early nineteenth century when trade-taking place was financed by
bill of exchange drawn by merchanting houses. At that time the merchants were
merely financing their own activities. As international trade grew and other lesserknown names wanted to import goods from abroad, the established merchants lent
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Merchant Banking
their names to the newcomers by agreeing to accept bills of exchange on their behalf.
The acceptance houses would charge a commission for this service and thus there
grew up the business of accepting bills of finance trade not merely of themselves, but
of others.
Merchant Banking
Commercial Banking and Investment Banking are often confused with Merchant
Banking. In many ways, there may be similarities in their functions. However, in
certain ways, Merchant Banking is distinctly different from commercial Banking and
Investment Banking.
The primary function of a commercial bank is to receive deposits from the public and
lend the same to others. Commercial Banks can undertake some of the merchant
banking activities like Issue Management whereas Merchant Banking Units can not
undertake commercial banking activities. However, the functions of Merchant
Banking may not widely vary from Investment Banking. The Merchant Banker
mainly deals with Issue Management, post issue services, corporate adviser services
etc. the Investment Banker undertaken trading in securities, Investment advises and
Bought out deals which are not the main activities of Merchant Bankers.
In todays Scenario the Merchant banker and management consultants undertake
advisory services to the corporate sector. The Merchant Banker advices corporation
and firms relating to opening of issues, receiving loans etc, which the management
consultants also do. The management consultant have a wide area operations like
production, Marketing, Personnel Relations, of finance etc. but they lack statutory
recognition to undertake capital market related activities which has enabled the
merchant banker to cater to the needs of the Corporate Sector.
A merchant bank may be considered as an institution which centres its operation on
all or most of the following activities.
(1) corporate financial advice, on such diverse matters as new share and bond
issues, capital reconstructions, mergers and acquisitions;
(2) The taking of deposits and currency, money market operations including foreign
exchange dealing;
(3) Medium-term lending and syndication of loans;
(4) Acceptance credits and all forms of export finance;
(5) The holding and dealing in quoted and unquoted investment; and
(6) Fund management on behalf of clients, most typically pension funds, unit trust,
investment trusts and wealthy individuals.
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Merchant Banking
DEFINITION
The first authoritative definition for the term Merchant Banker has been given in the
Rule 2 (e) of SEBI (Merchant Bankers) Rules, 1922. Accordingly, A Merchant
Banker means 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, Adviser of rendering Corporate Advisory Service in relation
to such Issue Management.
Merchant Banking
Sec/5 (b) of the Banking Regulation Act,1949 defines Banking as accepting, for the
purpose of lending or investment of deposits of money from the public, repayable on
demand or otherwise and withdrawable by cheque, draft, order or otherwise.
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,
consult, adviser or rendering corporate advisory service in relation to such issue
management.
Merchant Banking
The progress of any economy mainly depends on the efficient financial system of the
country. Indian economy is no exception financial system of the country. The
importance of the financial sector reforms affirms an effective means for solving the
problems of economic, financial and social in India and elsewhere in the developing
nations of the world. The progress of the Securities Industry of any country depends
mainly on the flow of funds. In fact, capital generation is the lifeblood of the capital
market without which the health and soundness of the financial system cannot be
geared and for which well-developed capital market as well as money market is
essential.
Indias capital market is among the largest in the developing world. The market is
comprised of 24 stock exchanges transacting long-term debt; debentures and equity
shares both electronic and physical forms. Derivatives financial instruments are also
be added to the market shortly. The number of firms listed on the Indian Stock
Exchange is more than the USA. Market Capitalisation of listed firms is 1980s was
similar to Brazil, Malaysia, Singapore and Denmark.
The capital market of the country, however, underwent dramatic changes since the
beginning of 1980s basically because of a progressive realization that the command
economy on which the emphasis was placed could not lead to higher levels of
economic development and that a slant towards a market-oriented economy is
necessary.
It is in the context of fast expanding economy and a liberalized and deregulated
atmosphere that the growth of the Indian Stock Market activities has to be viewed.
No wonder that the markets have registered a quantum jump judge by any standards.
Merchant Banking
The need for specialized merchant banking services was felt in India with the rapid
growth in the number and size of the issues made in the primary market. The
merchant banking services were started by foreign banks, namely the National
Grindlays Bank in 1967 and the City Bank in 1970. The Banking Commission in
its report in 1972 recommended the setting up of merchant banking institutions. This
marked the beginning of specialized merchant banking in India.
To begin with, merchant banking services were offered along with other traditional
banking services. In the mid-Eighties, the Banking Regulation Act was amended
permitting commercial banks to offer a wide range of financial services through the
subsidy rule. The State Bank of India was the first India Bank to set up merchant
Banking division in 1972. Later ICICI set up its Merchant Banking division followed
by Bank of India, Bank of Baroda, Canada Bank, Punjab National Bank and UCO
Bank. The merchant banking gained prominence during 1983-84 due to new issue
boom.
Merchant Banking
these firms. As mentioned above, commercial banks were the largest providers of
venture capital in the 1960s. In the middle to late 1980s, the decision to enter
merchant banking was thrust on other banks and bank holding companies by
unforeseen events. In those years, as a result of the LDC (less-developed-country)
debt crisis, many banks received private equity from developing nations in return for
their defaulted loans. At that time, many of these banks set up merchant banking
subsidiaries to try to get some value from this private equity.
Also at about that time, most commercial banks began refocusing their private equity
investments to middle-market and public companies (often low-tech, already
profitable companies) and, rather than providing seed capital, financed expansion or
changes in capital structure and ownership. Most particularly, they took equity
positions in LBOs, takeovers, or recapitalizations or provided subordinated debt in the
form of bridge loans to facilitate the transaction. Often they did both. Commercial
banks financed much of the LBO activity of the 1980s.Then, in the mid-1990s, major
commercial banks began once again focusing on venture capital, where they had
substantial expertise from their previous exposure to this kind of investment. Some of
these recent venture-capital investments have been spectacularly successful. For
example, the Internet search engine Lycos was a 1998 investment of Chase
Manhattans venture-capital arm. Commercial banks are permitted to report either
realized or unrealized gains on their merchant-banking portfolios, as long as they are
consistent in the reporting. This option makes it difficult for one to compare different
entities financial results and could lead to an overly liberal reporting of profits.
Important reason for the growth of merchant banking is due to exerting excess
demand on the sources of funds forever expanding industry and trade.
Corporate sector had the only alternative to avail of the capital market services
for meeting their long-term financial requirements through capital issues of equity
and debentures.
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Merchant Banking
With the growing demand for funds there was pressure on capital market that
enthused the commercial banks, share brokers and financial consultancy firms to
enter into the field of merchant banking and share the growing capital market.
In India have opened their merchant banking windows and are competing in this
field, and also doing advisory functions as merchant bankers as well as managing
public issues in syndication with other merchant bankers.
Merchant banks can play highly significant role in mobilizing funds of savers to
investible channels assuring promising return on investments. activity.
for
establishing
new
enterprises,
undertaking
Merchant banks have been procuring impressive support from capital market for
the corporate sector for financing their projects.
Merchant bankers advise the investors of the incentives available in the form of
tax reliefs, other statutory relaxations, good return on investment and capital
appreciation in such investment to motivate them to invest their savings in
securities.
Thus, the merchant bankers help industry and trade to raise funds, and the
investors to invest their saved money in sound and healthy concerns with
confidence, safety and organizations for higher yields.
Merchant Banking
trade to grow and survive. Merchant banker is, therefore, dedicated to achieve this
objective through his dynamism. He is always awake to renew his skills, develop
expertise in new areas so as to equip himself with the knowledge and techniques to
deal with emerging new problems of corporate business world. He has to keep pace
with the changing environment where Government rules, regulations and policies
affecting business conditions frequently change; where science and technology create
new innovations in production processes of industries envisaging immediate
renovations, diversification, modernizations or replacements of existing plant and
machinery or other equipments putting new demands for finances and necessitating
overhauling of the capital structure of the firms.
Merchant banker has to think and devise new instruments of financing industrial
projects. He has to assume wider responsibilities of saving industrial units from going
sick and guiding industries to be set up industrially backward areas to eliminate
regional imbalances in industrial development of the country. He has to guide the
wider section of the community possessing surplus money to invest in corporate
securities and other productive investment channels. He has to help the industry in
different forms to ensure that it runs risk free and devoid of uncertainty by assisting
the has to watch the interest and win over the confidence of the Government, its
agencies, along with the entrepreneurs, the investors and the whole community. He
must bridge the communication gap between different sections and resolve the
problem being faced in different areas concerned with the business world.
To discharge the above role, a merchant banker has t be dynamic. For this reason, a
merchant banker is sometimes, called M.B i.e. Moving Bottom, i.e., one who never
sits at one place, always moving- attending meetings and meeting clients and
constituents, doing business and getting business by attending meetings and
conferences, imparting knowledge to others and acquiring new knowledge to maintain
his supremacy in possession of latest information. His role depicts a personality cult,
which is unique and envious to be followed by others.
In the days ahead, merchant bankers have very significant role to play tuning their
activities to the requirements of the growth pattern of corporate sector, the industry
and the economy as a whole, which is, in it, a challenging task and to meet these
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Merchant Banking
challenges merchant bankers will have to be more vigorous and strategic in playing
their role. They will have also to adopt new ways and means in discharging their role.
A Merchant Banker can charge 0.5% as the maximum as commission for whole
of the issue.
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Merchant Banking
On
Type of Security
Devolving
1.Equity shares
underwriters
2.50
public
2.50
2.50
1.50
2.00
1.00
amount
on subscribed
by
2.Preference share/debentures
(v)
(vi) Other expenses like advertising, printing, Registrars expenses, stamp duty etc.,
in connection with the issue can be reimbursed from its clients.
COMMERCIAL BANKS
Basically deal in debt related finance
and their activities are appropriately
MERCHANT BANKS
Basically they deal
with mainly funds raised through
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Merchant Banking
Are
management
There
activities
in
restructuring,
areas
of
capital
amalgamations,
management
This
in
stock
activities
have
assumed the merchant banking activity in India. State Bank of India started merchant
banking in 1973 followed by ICICI in 1974. Both these Indian merchant bankers
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Merchant Banking
emerged as leaders in merchant banking having done significant business during the
period of 1974-1987 in comparison to foreign banks. The early and mid-seventies
witnessed a boom in the growth of merchant banking organizations in the country
with various commercial banks, financial institutions, brokers firms entering in to the
field of merchant banking.
The early growth of merchant banking in the country is assigned to the Foreign
Exchange Regulation Act, 1973 (FERA) where under large number of foreign
companies operating in India were required to dilute their foreign holdings in order to
continue business in the country. This had caused two-pronged effect viz. firstly, in
the form of spate in Foreign Exchange Regulation Act Issues eliciting interest of the
investors by creating massive awareness about capital markets amongst the new class
of investing public, secondly, merchant banking activity became attractive to banks
and the firms of consultants and share brokers who entered into this fields vigorously
to reap the advantages of the expanding capital markets.
Merchant Banking
not have a net worth of Rs.1 crore may have to close down their business. The entry is
denied to young, specialized professionals into merchant banking business.
3. Non co-operation of the issuing companies in timely allotment of securities and
refund of application money is another problem of merchant bankers. The guidelines
have put the responsibility on the merchant bankers. They have to seek the cooperation of the issuing company to shoulder the responsibility.
CURRENT SCENARIO
Merchant banking is an area that we need to build and grow in the years to come. As
India forms part of the global village, it becomes increasingly necessary for us to look
at this business in a more holistic manner.
Obviously, international players with strong domestic partners such as DSP Merrill
Lynch, JM Morgan Stanley, Kotak Mahindra Capital, together with experienced
organisations like Enam and institutional backed investment bankers such as ICICI
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Merchant Banking
Securities, etc., are the ones who have expertise, muscle, and placement power in a
greater measure than relatively new entrants.
The red hot economy is the obvious starting point. India is likely to end the year with
GDP growth in excess of 7 percent. Companies and private equity investors are sitting
on large piles of cash. In 2006 deal activity was largely restricted to the IT and
Telecom sectors.
Thus, while there is a steady flow of deals, there is now a shortage of talent to do the
job.
Merchant Banking activity was formally initiated into the Indian capital markets when
Grindlays Bank received the license from Reserve Bank in 1967. Grindlays which
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. Apart from meeting specially, the needs of smallscale units it provided management constancy services to large and medium sized
companies.
division in 1970. The division took up the task of assisting new entrepreneur and
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Merchant Banking
existing units in the evaluation of new projects and raising funds through borrowing
and issue of equity. Management consultant services were also offered. Consequent
to the recommendations of Banking Commission in1972, that Indian bank should start
Merchant Banking Division in 1972. In the initial years the SBIs objective was to
render corporate advice and assistance to small and medium entrepreneurs.
The economic reforms initiated by the Government since July 1991 in the files of
industry, trade and financial sector have paved the way for rapid development of the
economy. Several projects have been conceived since then and almost all the major
groups in the country that have announced their intentions to set-up mega projects in
infrastructure sector envisaging investment of thousands of crores. With several large
projects been set-up and many more on the drawing board, the demand for a complete
range of Merchant Banking services encompassing project advisory services, issue
management and financial advisory services for corporate sector has increased
considerably. This has led to a sharp growth in the Merchant Banking business in the
last 2 years.
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Merchant Banking
In United Kingdom, Merchant Banks came on the scene in the late eighteenth century
and early nineteenth century. Industrial revolution made England into a powerful
trading nation. Rich merchant houses that made their fortunes in a colonial trade
diversified into banking.
Issue capital,
They also used to finance sovereign government through grant of long-term loans.
Since the end of Second World War commercial banks in Western Europe have been
offering multiple services including Merchant Banking services to their individual and
corporate clients. British banks set-up division or subsidiaries to offer their customers
Merchant Banking services.
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Merchant Banking
US investments Banks have extended their operations to the international level. They
are largely responsible for the development of the Euro-dollar market in the securities
and globalisation of capital markets. They have a prominent presence in London and
other European financial centers. Merchant Banks have today a strong parent, a
strong balance sheet and a strong international network to play a global role.
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Merchant Banking
CATEGORIES
ACTIVITIES
NETWORTH
Category I
Category II
Category III
Category IV
an issue.
To act only as adviser or consultant to an issue
Nil
Merchant Bankers are classified into 4 categories as shown in the above table having
regard to their nature and range of activities and their responsibilities to SEBI,
investors and issuers of securities. The minimum net worth and initial authorization
fee depends on the category. The first category consists of merchant bankers who
carry on any activity of issue management, determining financial structure, tie-up of
financiers, advisor or consultant to an issue, portfolio manager and underwriter. The
second category consists of those authorized to act in the capacity of comanager/advisor, consultant, and underwriter to an issue or portfolio manager. The
third category consists of those authorized to act as underwriter, advisor or consultant
to an issue. The fourth category consists of merchant bankers who act as advisor or
consultant to an issue.
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Merchant Banking
Friendliness and
cooperation must flow as natural traits in the merchant banker to win the trust of the
clients.
CONTACTS : success of merchant banker depends upon his sociable nature and the
richness of wider contacts. A merchant banker is supposed to be acquainted deeply
with all the constituents of merchant banking. The scope of contact encompasses
intimate contiguity and acquaintances within his own organization, Central and State
Government Offices where compliances under various relevant enactments are to be
reported, Indian and foreign banks, financial institutions at Central and State levels,
promoters/directors/owners and chief executives of the private and public enterprises
which would be prospective beneficiaries of merchant banking services, printers,
advertising agencies, brokers and stock exchange dealers, advocates and solicitors and
members of the press whose services are availed of in executing merchant banking
assignments. Merchant bankers should widen contacts and references and continue to
maintain them with goodness, honour and humour by meeting people.
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Merchant Banking
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Merchant Banking
bank/financial institution, the Merchant Banker relies on the said appraisal before
accepting an assignment. However, where the project has not been appraised by
as bank/financial instituion, the Merchant Bank undertakes a detailed evaluation
of the project before taking up an assignment for issue management.
Legal aspect
The factors that are looked into in case of the legal aspects are:
Compliance with the SEBI guidelinesand the various guidelines issued by the
Ministry of Finance and Department of CompanyAffairs.
Pending litigations towards tax liabilities or any criminal/civil prosecution any of
the directors for any offenses.
Fair and adequate disclosures in the prospectus.
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Merchant Banking
marketing of the issue to the general public through various vehicles such as press,
brokers, etc.
Bought out Deals
The concept of wholesale but out of public offerings by the Merchant Bankers
started off with over the Counter Exchange of India where a Merchant banker acts
also as a sponsor and either takes up the entire issue to be offered wholly of jointly
with other co-investors and off-loads the same to the public at a later date by an
offer for sale. Major amendments were made to the SEBI regulations regarding
Merchant Bankers. The duration of this transaction period has not officially been
announced.
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Merchant Banking
27
Merchant Banking
The applicant should not carry on any business other than those connected with
the securities market
The applicant should have necessary infrastructure like office space, equipment,
manpower etc.
The applicant must have at least two employees with prior experience in merchant
banking
The applicant should not have been involved in any securities scam or proved
guilt for any offence
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Merchant Banking
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Merchant Banking
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Merchant Banking
ISSUE MANAGEMENT:
The public issue of securities is the core of merchant banking function. At one
time it was constructed as the sole function. Merchant bankers were identified as
issue houses. It was later perceived that they provide other financial services.
When companies seek to raise resources for implementation of a new project or
finance expansion or modernization or diversification of an existing unit or fund
long term working capital requirement, they retain the services of a merchant
banker. To a large extent the type of issue would vary with the purpose for which
funds are raised. Merchant bankers when retained as managers to issue will have
to assist the company in all the stages connected with public issue.
The merchant bankers help corporate to raise money from the markets through the
issue of shares, debentures, bonds etc. They are designated as managers to the
issue. Their main business is to attract public money to capital issues.
They usually render the following services:
Drafting of prospectus and getting it approves from the stock exchanges.
Obtaining consent/acknowledgement from SEBI.
Appointing bankers, underwriters, brokers, advertisers, printers etc.
Obtaining the consent of all the agencies involved in the public issue.
Holding road shows, to sell the issue. These shows are held for the analysts,
brokers & institutional investors. The purpose of these shows is to answer queries
from these people about the company and the project for which the funds are
being raised.
Deciding the pattern of advertising.
Deciding the branches where application money should be collected.
Deciding the dates of opening and closing of the issue.
Obtaining the daily report of application money collected at various branches.
Obtaining subscription to the issue.
After the close of the issue, obtaining consent of stock exchange for deciding basis
of allotment etc.
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Merchant Banking
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Merchant Banking
Ordinarily, not more than two merchant bankers should be associated as lead
managers, advisors and consultants to a public issue. In issues of over Rs. 100
crores, the number could be up to a maximum of four.
The responsibilities of merchant bankers in management of public issues are
many. Some of these are:
We have seen that many unscrupulous promoters have raised money from the
market. This has hurt the investors a lot and has also made investors nervous
about stock market investments. This in turn affects the functioning of stock
markets both the primary and the secondary markets. It is therefore necessary that
merchant bankers are satisfied with the viability of the project, which they can
then sell to the investors with confidence.
It is the
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Merchant Banking
New companies
entering the markets for the first time, always face number of problems in raising
funds from the market. One of the biggest problems of course that the company is
not well known to the investors and many of them will be unwilling to invest their
money in such ventures. Many a times even existing companies may find it
difficult to raise money, due to some reasons.
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Merchant Banking
exchange ratio.
PROJECT COUNSELLING
Project counseling is very important and lucrative merchant banking services
which only very few merchant bankers having advantages of knowledge, skills
and experience over others are able to render satisfactorily. The corporate seek
advice in respect of identification of profitable investment opportunities in the
related business areas (like forward/backward integration) or as part of
diversification process. The merchant bankers carry out detailed studies on
product demand patterns, cost structures, etc., to enable the corporate in
preparation of feasibility study may involve arrangement of a foreign
collaboration, advice on technical parameters and also legal issues.
Scope of services
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Merchant Banking
Deciding upon the financing pattern to finance the cost of the project.
Project report
Project report consists of technical process, location, management profile, means
of financing, reports on market surveys and market explorations. Merchant
bankers advise the clients on project preparation. Merchant bankers, on behalf of
their clients, engage technical consultants specialized in the specific area, and
marketing experts to prepare technical feasibility report and market survey
reports. Merchant bankers maintain the list of such experts approves by financial
institutions and assign the work to these experts.
Project report purpose
Project report about the proposed activity is prepared to obtain government
approvals particularly in the following areas:
Grant import license for importing raw material, plant, machinery and
equipments.
LOAN SYNDICATION
It refers to assistance rendered by merchant banks to get mainly term loans for
projects. Such loans may be obtained from a single development finance
institution or a syndicate or consortium as in the case of large term loans.
Merchant banks can also help corporate clients to raise syndicated loans from
commercial banks.
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Merchant Banking
Scope of service
Once the client company has decided about the project proposed to be undertaken,
the next step is looking for the sources wherefrom funds could be procured to
implement the project. The responsibility of locating the sources of finance,
approaching these sources by putting in requisite prescribed applications and
complying with all the formalities involved in the sanction and disbursal of loan
rests with the merchant bankers who provide the service of loan/credit
syndication.
Loan syndication in the case of domestic borrowing is undertaken with the
institutional lenders and the banks. Amongst institutional lenders the following
institutions are the main suppliers of the long and medium term funds with which
the merchant bankers contact, liaison and arrange loans working for and on behalf
of their clients.
1. All India financial institutions
i. Industrial Finance Corporation of India (IFCI)
ii. Industrial Development Bank of India (IDBI)
iii. Industrial Credit & Investment Corporation of India Ltd (ICICI)
2. State level financial bodies
i.
ii.
iii.
ii.
iii.
Merchant Banking
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Merchant Banking
practices that exist within the company and suggest alternative policies. They also
advise the company on rehabilitation and turnaround strategies, which would help
companies to recover from their current position.
FACTORING SERVICE
Factoring involves the outright sale of account receivable. By such sale a client (the
exporter or manufacturer) transfers his/her ownership of the accounts to a factor (an
organization, firm). The factor buys all the clients outstanding invoices and takes over
all the subsequent dealings with the buyer/importer/customer. It is short-term debt
financing. Here three parties are involved
1.The factoring organization /firms
2.The manufacturer/exporter/seller
3.The importer/customer/buyer
Role Of Merchant Banker In Factoring
The merchant banker may act as factor organization with a view to earning a great
amount of commission. The factor provides the following services:
(a) Financing
(b) Advisory services if necessary
(c) Collection of bills/Account Receivable against sales proceeds.
(d) Maintenance of sales ledger
(e) Provide further if necessary
(f) Covering losses if there are any
ASSET SECURITIZATION
It is a process through which some inactive assets (mortgage assets) are converted
into cash/active assets. It is long-term debt financing. Here assets are converted
into long-term bonds. The whole process is done by the Special Purpose Vehicle
(SPV). In this approach, the merchant banker for issuance of security bonds
against the assets with a matching of time and terms between mortgage property
and security bonds. Here the selection of asset is generally considered on the basis
of the following:
(I) Quality of assets
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Merchant Banking
Originating Institutions/Firm
FOREX SERVICES
This aspect of banking is becoming increasingly important as the forex flow in the
country is increasing and the international markets are funding the operations of
the corporate in India. The success of any business is measured by the fund
management; this makes treasury management as a very critical finance function.
Management of treasury profit center requires a wide variety of knowledge in the
area of global money markets and financial instruments such as deposit
certificates, treasury bills, forecasting, source evaluation and cost of domestic and
foreign currency funds. Treasury and risk management ensures cost effectiveness
in planning strategies in this era of deregulation.
Role of merchant banker in Forex function
The currency values, interest rates, share index and commodities affect the
financial derivatives like futures, swaps and other tools of risk management.
Corporates therefore employ well-trained professionals to manage treasury and
forex functions so that they can ensure competent management. Thus, this service
is provided to Corporates through merchant bankers. Merchant bankers assess
various markets to advice Corporates or other banks that needs currency.
Merchant bankers constantly update about the policies of the regulatory bodies,
monitors the current prices, makes predictions based on the analysis of trends etc
HIRE PURCHASE SERVICE
It involves a system under which term loans for purchases of goods and services
are advanced to be liquidated in stages through a contractual obligation. The
goods whose purchases are thus financed may be consumer goods or producer
40
Merchant Banking
goods or they may be simply services such as air travel. Hire-purchase credit may
be provided by the seller himself or by any financial institution. However, unlike
in other countries, the emphasis in India is on the provision of instalment credit
for productive goods and services rather than for purely consumer goods.
Role of Merchant Banker
Merchant Banker undertakes the activity of financing for hire-purchase activities.
The merchant banker looks more to the credit-worthiness and business morality of
the buyer than the value of security
LEASE FINANCE COMPANIES
Lease finance companies provide finance to acquire the use of assets for a
stipulated period of time without owning them. The user of the asset is known as
the lessee, and the owner of the asset is known as the Lessor. Leasing is mediumterm arrangement for finance.
Role of Merchant Banker
Merchant Bankers helps in assessing the credit risk of industrial borrowers. The
merchant bankers provide help in evaluating lease proposals. He analyse the
merits and demerits of lease finance with reference to a given proposal and leave
it to their clients to decide on the appropriate source and type of finance, thus
enlarging their range of choices and the variety of services available to them.
VENTURE CAPITAL
Venture capital is money provided by professionals who invest alongside
management in young, rapidly growing companies that have the potential to
develop into significant economic contributors. Venture capital is an important
source of equity for start-up companies. Professionally managed venture capital
firms generally are private partnerships or closely-held corporations funded by
private and public pension funds, endowment funds, foundations, corporations,
wealthy individuals, foreign investors, and the venture capitalists themselves.
Role of Merchant Banker
41
Merchant Banking
They also provide technical, financial & managerial services & help the company
to set up a track record.
The assistance should mainly be for equity support, through loan support to
supplement this may be extended.
RECENT TRENDS
Merger & Acquisition transaction -- Merchant banks' services not taxable
The Finance Ministry has excluded services provided by merchant banks and other
agencies in a merger and acquisition (M&A) transaction from the scope of taxable
services provided by a `management consultant.'
The rationale accorded is that the role of such agencies is limited to compliance of
any statute or regulation -- such as takeover regulations of the Securities and
Exchange Board of India (SEBI) -- and not governed by any contractual
relationship with the advisee company.
Merchant banks do not provide any consultancy on an M&A transaction, but merely
verify and submit a report to the authorities concerned, according to the Central Board
for Excise and Customs (CBEC).
Barring the services of merchant banks, any service rendered in relation to an M&A
transaction will be covered under the scope of taxable service provided by the
management consultant and will be liable to service tax, the Board has ruled. Industry
representatives held that services provided in respect of M&A cannot be construed as
a management consultancy service, but were in the nature of financial advisory
service.
42
Merchant Banking
Rank
05
Rank
04
Kotak/Goldman Sachs
Mkt
share
05
17.3
Mkt
share
04
13.1
Value
($m)
Deals
2,534
13
43
Merchant Banking
Morgan Stanley
Merrill Lynch & Co.
Standard Chartered
Ernst & Young
Citigroup
Ambit Corporate Fin
DBS Group
ICICI Securities
UBS
2
3
4
5
6
7
8
9
10-
2
3
9
1
6
8
5
-
15.2
12.1
6.7
6.7
6.6
6.4
4.8
4.4
3.8
14.7
14
4.8
16.9
11
4.9
12.2
-
2 ,227
1,771
981
980
962
936
704
649
550
11
12
5
37
8
21
1
10
3
1. ENAM
44
Merchant Banking
2. ICICI SECURITIES
ICICI Securities Limited is a leader across the spectrum of Merchant Banking. We are
experienced in every aspect of the business from domestic and international capital
markets advisory, to M&A advisory, Private Equity syndication, Restructuring and
infrastructure advisory. Our investment banking team, based across key cities in India
and New York, London, and Singapore consists of professionals with expertise across
a range of industries.
ICICI SECURITIES provide following services:
Mergers and Acquisitions: - ICICI Securities Limited is amongst the first Indian
investment Banks to form a dedicated M&A practice and continues to be a leader
by providing innovative and unique solutions to achieve varied objectives of the
client. They offer a full range of advisory services, which include joint ventures,
mergers, acquisitions, and divestitures.
Equity Capital Markets: - ICICI Securities Limited is at the forefront of capital
markets advisory having been involved in most major book building and fixed
price offerings over the last decade. It is amongst the leading underwriters of
Indian equity and equity-linked offerings.
Infrastructure Advisory: - ICICI Securities Limited has a dedicated infrastructure
vertical focused on assisting clients in identifying and capitalising on the
45
Merchant Banking
Kotak Securities Limited, a subsidiary of Kotak Mahindra Bank, is the stock broking
and distribution arm of the Kotak Mahindra Group. The company was set up in 1994.
Kotak Securities is a corporate member of both The Bombay Stock Exchange and The
National Stock Exchange of India Limited. Its operations include stock broking and
distribution of various financial products - including private and secondary placement
of debt and equity and mutual funds. Currently, Kotak Securities is one of the largest
broking houses in India with wide geographical reach.
The company has four main areas of business:
Kotak Institutional Equities: - Kotak Institutional Equities, among the top
institutional brokers in India. It mainly covers secondary market broking and the
marketing of equity offerings, including IPOs, to domestic and foreign
institutional investors.
Structured Finance (Project Finance & Advisory Business): -KMCC has
developed expertise in various vertical segments in the infrastructure sector
including power, oil, gas, ports, automobiles, steel & metals and hotels, by
offering structured finance solutions. Some of the transactions executed by this
team include:
Advisor to one of the largest LNG projects on the Western coast of India.
46
Merchant Banking
Mergers & Acquisitions: -In the area of Mergers & Acquisitions, we provide
our clients expertise and a comprehensive set of services that help them achieve
their strategic and financial objectives. Our spectrum of services include:
Divestments
4. CITIGROUP
Citigroup Corporate and Investment Banking achieve the extraordinary for our clients
around the world. No financial institution is more committed to advancing the goals
of its clientsour diverse and talented staff in more than 100 countries advises
companies, governments and institutions on the best ways to realize their strategic
objectives. We create solutions for and provide the broadest possible capital and
market access to thousands of issuer and investor clients. And no institution better
executes the increasingly complex payment and cash management solutions required
in today's global economy. The features Citigroup are as follows: Over the years, Citigroup has established a track record of outstanding business
milestones such as Cash Management, pioneered by Citigroup in 1986 and
utilized by over 900 Corporates with through-puts totaling around $ 35 billion
(8% of India's GDP).
It is India's largest foreign bank in the FX (foreign exchange) market with a 14 per
cent market share.
As the leading custodian, Citibank has over $22 billion of custody assets under
management.
47
Merchant Banking
DSP Merrill Lynch Limited (DSPML), among India's leading investment banking and
brokerage company, is a culmination of a long standing relationship between DSP
Financial Consultants Ltd., and Merrill Lynch & Co., the leading international capital
raising, financial management and advisory company. DSPML is a full service
investment bank and broking company with leadership position in M&A, Capital
Raising, Securities Research, Equity & Debt Brokering, and Investment Advisory
services. Euro money Magazine has ranked DSPML as the "Best Domestic Securities
firm in India" for the last four consecutive years. This Transaction heralds DSPML as
a key player in the private equity market. The service features of DSPML are as
follows: DSPML has consistently been rated as one of India's leaders in origination,
distribution, and trading of equity and debt securities.
DSPML has consistently brought reputable issues to the capital markets.
48
Merchant Banking
A diverse client base made up of India's most prestigious private and public sector
corporations
and
multinational
corporations
have
rendered
DSPML a
49
Merchant Banking
Advisory services: UPFC, with its long experience, advises its clients for various
advisory services such as capital Structuring, loan syndication etc.
5. Project certification: UPFC also certifies the projects going to capital markets
for raising funds. This is a specialized activity of the Corporation.
6. Other financial services: As a part of its commitment to provide professionalized
financial services to its clients, UPFC also offers Bill Discounting, Equipment
Leasing & Hire Purchase Services, Short- term loan, Brand Equity loan, etc to
meet diversified requirements of it's clients
7. JM Morgan Stanley
50
Merchant Banking
They are known for lead managing some of the most complex and
innovative and large equity and debt offerings in India and abroad by the Indian
issuers. A robust deal-flow across sectors has allowed them to build significant
traction with the financial investors. This helps in raising private equity capital for
the companies.
51
Merchant Banking
The various studies which had been undertaken in India for evaluating the
performance of Merchant Banking firms and the implications of these on securities
industry. No single study has been emerged so far pertaining to the evaluation of
Merchant Banking firms and in-depth study on their activities as well as operational
and financial performance in the light of changing regulatory environment.
In recent past, the small investor has turned his back on the primary capital market.
Issue after issue as failed to capture his imagination, rekindle his enthusiasm, and
reinforce his faith. He has lost all hopes of appreciation of his investment. And this
when all these years millions have though capital market, ate capital market and
dreamt capital market. It needed an extraordinary effort and skill the drive the small
investor away! High premiums, false premiums and gray market operations. The
professed protector of his interests first laid down the dictum of proportionate
allotment, then of minimum subscription, all working against his interests. This
would make an observant student of the stock market infer that there is some game
plan afoot to dethrone the small investor from his prominent; he was believed to be
the king.
With the coming to SEBI, an organisation that was ostensibly brought into existence
to guard the interest of the small investor, hopes ran high that the small investor
would now have a safe playing field. But these hopes were soon belied. Far from
guarding the interests of the investing public, SEBI embarked on a course of action,
which has positively hurt them. The latest fiat of EBI bans corporate advertising after
the receipt of acknowledgement card by a company wanting to go public. SEBIs this
action has caused the closure of an information window. Now 50 million potential
investors are deprived of official and authentic information given by the Issuer. It is
hard to understand reasons for this drastic and totally uncalled for action. While there
has been no official explanation for this fiat, there is reason to believe that it may be
based on a wrong perception of the role for corporate advertising.
All this has been done perhaps because the corporate and intermediaries is to follow
the practices of Western capital markets here, oblivious of the fact that our capital
markets are altogether different in structure, in systems and in the number of
participantsFreedom of commercial expression could be exploited by some to serve
52
Merchant Banking
their own ends, just a s freedom of speech and expression could be abused but this has
not led our Government to put arbitrary restrictions on our freedom.
Merchant Bankers have reason to believe they will be handicapped without the
marketing support. But the worst sufferer would be the investor, especially the small
investor it is this class, which forms the backbone of the capital market. As a result of
the ban, the small investor would be deprived of the opportunity to study the
corporate profile of the Issuer. In the absence of adequate information, they will have
to depend on manipulated facts and information fed by unreliable sources.
Besides, there are larger issuers arising out of SEBIs action. From the point of view
of liberalisation of the economy, SEBI has taken a retrograde step. A market economy
flourished through bigger markets, higher sales and lesser profits. To achieve this
performance, a company needs an aggressive marketing plan and advertising effort is
the main thrust to such a plan. No marketing plan can be worthwhile unless it is
backed by an effective advertising plan.
It consists of
innumerable investors who take own individual investment decisions. Whatever, the
system, it is this market that will bring in the funds. If these markets destabilised, the
investors will look for alternative avenues to invest their funds. SEBI in its one of the
first documents on SEBI and Investor Protection, Development and Regulation of
Securities Market clearly specifies significance of regulating capital market and its
future plans for fulfilling the twin objectives viz., Development of capital market and
investor protection are explained in introductory paragraphs. It speak out that, The
decade of the 1980 witnessed a phenomenal growth and development of the securities
market, demonstrated its potential not only to mobilize the savings of the horseshold
sector but also to allocate it with some degree of efficiency for industrial
development. The dilution of the holdings of the multinational companies at
affordable prices in the latter part of the 1970s had generated considerable interest,
which was, carries well into the next decade. Several companies came in the early
part of the 1980s and successfully raised large resources from the market especially
through debt instruments, which further sustained investor interest.
There were
Merchant Banking
aided the market. India was then entering the phase of liberalization and decontrol
which was to accelerate and gather momentum in the 1980s.
By the end of the decade, the securities market in India came to be firmly integrated
with the financial system of the country. With the corporate sector increasingly
relying on the securities market for meeting their long-term requirement of funds, the
securities market their long-term requirement of funds; the securities market
competed on equal terms with the Development Financial Institutions, which were the
traditional purveyors of long-term capital. The emergence of the securities markets
into the main stream of the financial system of the country was thus one of the major
economic processes of the 1980s an inevitable outcome of the maturing process of
the financial system. They brought about notable changes in the capital structure of
the companies across industries, gave birth to new intermediaries and institutions in
the securities market and created a new awareness and interest in investment
opportunities in the securities market among investor. In spite market, its quality
lagged far behind and there was absence of adequate professionalism and fair
competition among the various players in the market.
QUESTIONAIRE
STATE BANK OF INDIA
Experience:- 23 years
Experience:- 1 years
54
Merchant Banking
This
helps
the
mergers
shreeram Industries,etc
55
Merchant Banking
ANNEXURE
SCHEDULE I - FORMS
FORM A
SECURITIES AND EXCHANGE BOARD OF INDIA
(MERCHANT BANKERS) REGULATIONS, 1992
(REGULATION 3)
56
Merchant Banking
Merchant Banking
Merchant Banking
Year of Issue
Times subscribed
Name of lead merchant banker
Functional responsibilities
b) Investment Adviser: Name of Client Year for which services are rendered
Nature of services rendered
c) Underwriting
Name of client Type and size
Amount underwritten of Issue
% Age of issue under Year of Issue
Whether there was any devolvement written
d) Portfolio Management
Name of Scheme
Features of the Scheme
Number of Clients
Total Volume of Funds managed
Average Returns
e) Consultants/Advisors to the Issue
Name of the Client
Year of Issue
Type and Size of Issue
Nature of services rendered
Name of Lead Merchant Banker(s)
4. CLIENT INFORMATION
4.1 List of major clients with address
Name
Services Rendered
4.2 If the applicant is proposing to engage in Merchant Banking activities for the first
time, the experience of key management personnel to be indicated.
Name of Key management personnel
Qualification
Previous positions held
Experience particularly in respect of merchant banking activities
59
Merchant Banking
4.2 (a) If the applicant is proposing to engage in Merchant Banking activities for the
first time, business plan of the company with projected volume of activities and
income for which registration is sought to be specifically given.
4.3 Details of infrastructure including computing facilities, equity research and
database available with the applicant.
4.4 Any other information considered relevant to the nature of services rendered by
the applicant.
5. FINANCIAL INFORMATION
5.1 Capital Structure (Rs. in lakhs)
Preceding year
Current year
a) Paid-up capital
b) Free reserves
(excluding re- valuation reserves)
c) Total (a) + (b)
Note: - 1. In case of partnership or proprietary concerns, please indicate capital minus
drawings.
2. In case of partnership or proprietary concerns, please indicate the financial position,
means, and networth of the partners.
5.2 Deployment of Resources (Rs. in lakhs)
Year prior to the preceding year of current year
Preceding year
Current year
60
Merchant Banking
current year
year
issue
*As fees charged by the merchant banker may vary from issue to issue, please
indicate range within which fees have been charged.
5.4 Net Profit
Year prior to the preceding year of current year
5. 5 Dividend
Preceding year
Current year
Preceding year
Current year
Amount
Percentage
Note: Please enclose three years of audited annual accounts. Where unaudited reports
are submitted, give reasons. If minimum networth requirement has been met after last
audited annual accounts, audited statement of accounts of a later date also be
submitted.
5.6 List of major shareholders (holding 5% and above of applicant directly or along
with associates
Applicable only to limited companies)
Shareholding as on: ______________________________
Name of shareholder
No. of Shares held
% age of total paid up capital of the company
5.7 Name and Address of the Principal bankers of the applicant.
5.8 Name and address of the Auditors.
6. OTHER INFORMATION
6.1 Details of all settled and pending disputes:
61
Merchant Banking
Personnel
in the
last three
years.
DECLARATION
THIS DECLARATION MUST BE SIGNED BY TWO DIRECTORS, TWO
PARTNERS OR THE SOLE PROPRIETOR AS THE CASE MAY BE
I/We hereby apply for registration. I/We warrant that I/We have truthfully and fully
answered the questions above and provided all the information which might
reasonably be considered relevant for the purposes of my registration. I/We declare
that the information supplied in the application form is complete and correct.
For and on behalf of ------------------------------------------ (Name of Applicant)
Director/Partner or Sole Proprietor Director/Partner ___________________
(Name in Block Letters) (Name in Block Letters) _______________________
Date
FORM B
SECURITIES AND EXCHANGE BOARD OF INDIA
(MERCHANT BANKERS) REGULATIONS, 1992
(REGULATION 8
CERTIFICATE OF REGISTRATION)
In exercise of the powers conferred by sub-section (1) of section 12 of the Securities
and Exchange Board of India Act, 1992, read with the rules and regulations made
there under the Board hereby grants a certificate of registration to
______________________________ as a merchant banker in Category I subject to
the conditions in the rules and in accordance with the regulations to carry out the
following activities: 1. Management of any issue, including preparation of prospectus, gathering
information relating to the Issue, determining financing structure, tie up of financiers,
final allotment and refund of excess application money.
62
Merchant Banking
2. Investment Advisor.
5. Managers, Consultant or Adviser to any issue including corporate advisory
services.
6. Consultant or Advisor.
(*Delete whichever are not applicable)
II. Registration Code for the merchant banker is MB / / /
III. This certificate shall be valid from _____________ to _________ and may be
renewed as specified in regulation 9 of Securities and Exchange Board of India
(Merchant Bankers) Regulations, 1992.
Place
Date
By Order
Sd/For and on behalf of Securities and Exchange Board of India
FORM C
SECURITIES AND EXCHANGE BOARD OF INDIA
(MERCHANT BANKERS) REGULATIONS, 1992
(REGULATION 23)
DUE DILIGENCE CERTIFICATE
To,
SECURITIES AND EXCHANGE BOARD OF INDIA
Dear Sirs,
SUB: ISSUE OF ____________________ BY _______________________ LTD.
We, the under noted Lead Manager(s) to the above mentioned forthcoming issue state
as follows:
1. We have while finalizing the draft prospectus/letter of offer pertaining to the said
issue have examined various documents and other material as for adequate disclosures
to the investor;
63
Merchant Banking
2. On the basis of such examination and the discussions with the company, its
directors and other officers, other agencies, independent verification of the statements
concerning objects of the issue the contents of the documents and other material
furnished by the company, WE CONFIRM that:
(a) the draft prospectus/letter of offer forwarded to SEBI is in conformity with the
documents, materials and papers relevant to the issue;
(b) all the legal requirements connected with the said issue have been duly complied
with; and
(c) the disclosures made in the draft prospectus/letter of offer are true, fair and
adequate to enable the investors to make a well informed decision as to the investment
in the proposed issue.
PLACE:
DATE:
LEAD MANAGER (S) TO THE ISSUE
N. B. A list of documents and materials examined may be forwarded along with this
certificate.
Foot notes
28. The figures "II/III/IV" after the word "Category I" and before the words "subject
to the conditions" in paragraph 1 in Form A of Schedule I were deleted by SEBI
(Merchant Bankers) (Amendment) Regulations, 1996 published in the Official Gazette
of India dated 06.06.1996.
29.
The words "3. Underwriting of Issue" and "4. Portfolio Manager Service" after
64
Merchant Banking
65
Merchant Banking
CONCLUSION
The merchant banker plays a vital role in channelising the financial surplus of
the society into productive investment avenues. Hence before selecting a merchant
banker, one must decide what are the services for which he is being approached.
Selecting the right intermediary who has the necessary skills to meet the requirements
of the client will ensure success.
It can be said that this project helped me to understand every details about
Merchant Banking and in future how its going to get emerged in the Indian economy.
Hence, Merchant Banking can be considered as essential financial body in Indian
financial system.
Market development is predicated on a sound, fair and transparent regulatory
framework. To sustain the growth of the market and crystallize the growing
awareness and interest into a committed, discerning and growing awareness and
interest into a essential to remove the trading malpractice and structural inadequacies
prevailing in the market, and provide the investors an organized, well regulated
market place in future.
66
Merchant Banking
BIBLIOGRAPHY
BOOKS REFFERED
www.google.co.in
www.yahoo.com
www.economictimes.com
www.jmmorgansranley.com
www.dspml.com
www.sebi.com
WEBSITES
67