MERCHANT BANKING AND FINANCIAL

SERVICES
MERCHANT BANKING AND FINANCIAL SERVICES

COURSE OBJECTIVES COURSE OUTCOME

• Understand the modes of • Good knowledge on
issuing securities Merchant Banking activities
• Acquire financial evaluation
technique of Leasing and
Hire Purchase
 SYALLBUS
UNIT- I MERCHANT BANKING
 Introduction – An Over view of Indian Financial
System
 Merchant Banking in India
 Recent Developments and Challenges ahead
Institutional Structure
 Functions of Merchant Bank
 Legal and Regulatory Framework Relevant
Provisions of Companies Act- SERA - SEBI
Guidelines- FEMA, etc.
 Relation with Stock Exchanges and OTCEI
 UNIT –II ISSUE MANAGEMENT
 Role of Merchant Banker in Appraisal of Projects,
Designing Capital Structure and Instruments
 Issue Pricing – Book Building – Preparation of
Prospectus Selection of Bankers, Advertising
Consultants, etc.
 Role of Registrars
 Bankers to the Issue, Underwriters, and Brokers.
 Offer for Sale
 Green Shoe Option
 E-IPO, Private Placement – Bought out Deals –
Placement with FIs, MFs, FIIs, etc. Off - Shore
Issues. – Issue Marketing – Advertising Strategies –
NRI Marketing – Post Issue Activities
 UNIT III - OTHER FEE BASED SERVICES
 Mergers and Acquisitions
 Portfolio Management Services
 Credit Syndication
 Credit Rating
 Mutual Funds
 Business Valuation
UNIT IV FUND BASED FINANCIAL SERVICES
 Leasing and Hire Purchasing
 Basics of Leasing and Hire purchasing
 Financial Evaluation.
UNIT V-OTHER FUND BASED FINANCIAL SERVICES

 Consumer Credit
 Credit Cards
 Real Estate Financing
 Bills Discounting
 Factoring and Forfaiting
 Venture Capital
 UNIT I – MERCHANT BANKING
 Chapter I- Introduction – An Over view of Indian Financial
System
 Chapter II- Merchant Banking in India
 Chapter III- Recent Developments and Challenges ahead
Institutional Structure
 Chapter IV - Functions of Merchant Bank
 Chapter V-Legal and Regulatory Framework Relevant
Provisions of Companies Act- SERA - SEBI Guidelines-
FEMA, etc.
 Chapter VI-Relation with Stock Exchanges and OTCEI
Chapter I- Introduction to Financial System
 The financial system is the system that allows the transfer of money
between savers (and investors) and borrowers.
 A financial system can operate on a global, regional or firm level.
 Examples………
 Life Insurance Corporation, the country's biggest insurer, committed to
invest Rs 1.5 lakh crore in Indian railways over the next five years
 Post office saving fund – Indian Government infrastructure development
Definition ……..
• According to Robinson, the primary function of system is “ To provide a
link between savings and investments for the creation of new wealth and
to permit portfolio adjustment in the composition of the existing wealth”.
 Features of Financial system

 It provides an ideal linkage between depositors and

investors, thus encouraging both savings and
investments.
 It facilitates expansion of financial markets over space
and time.
 It promotes efficient allocation of financial resources for
socially desirable and economically productive purposes.
 It influences both the quality and the pace of economic
development.
 Functions of Financial System
 Link between Savers and Investors
 Helps in Projects selection
 Allocation of services
 Information available
 Reduce cost of Transaction and Borrowing
 Promotion of Liquidity
 Financial Deepening and Broadening
 Structure of Financial System
Financial system consists of four segments or components.
 Financial Institutions
 Financial Markets
 Financial Instruments
 Financial Services
 Indian Financial
System

Financial Financial Financial Financial

Institutions Markets Instruments Services

Fund /Asset
Regulatory Organized Unorganized Primary
based

Non-Fund / Fee
Intermediaries Capital Market Money Market Secondary
Based services

Non
Intermediaries
 Financial Institutions
• The term “Financial Institutions” includes all kinds of organizations which
intermediate and facilitate financial transactions of both individuals and
corporate customers.
• They may also classified into three categories
 Regulatory-Regulatory financial institutions are Security Exchange Board
of India (SEBI), Insurance Regulatory and Development Authority of India
(IRDA), Reserve Bank of India (RBI), Asset Management Company (AMC)
etc. Before investors lend money, they need to be reassured that it is safe
to exchange securities for fund . For Example The Reserve Bank of India
regulates the money market and SEBI regulates capital market
Financial Institutions………
 Intermediaries- Intermediaries supply only short term funds to individuals
and corporate customers. They consist of banking and non-banking
intermediaries. Examples Banks-State Bank of India (SBI), Punjab National
Bank(PNB) Non Banking Intermediaries Life Insurance Corporation (LIC),
Unit Trust of India (UTI).
 Non Intermediaries- These non intermediaries mainly provide long term
funds to individuals and corporate customers. Example-National Bank for
Agriculture and Rural Development (NABARD) , Industrial Development
Bank of India(IDBI),
 FINANCIAL MARKETS
• Financial Markets can be referred to as those centers and
arrangements which facilitate buying and selling of financial
assets ,claims and services .
• The Classification of financial markets in India is as follows
 Unorganized Markets
 Organized Markets
Unorganized Markets
 Money Lenders
 Chit funds
 Indigenous Bankers etc
Organized Markets
 Capital Market- The capital market is a market for financial assets which
have a long or indefinite maturity. Generally, it deals with long term
securities which have a maturity period of more than one year. It includes
primary market and secondary market.
 Money Market- It can be defined as a market for short term money and
financial assets. It deals with up to one year financial assets
 Financial Instruments
• A financial instrument is a claim against a person or an institution for the
payment at a future date a sum of money or a periodic payment in the
form of interest or dividend.
 Primary Financial Instrument- A financial instrument those price is based
directly on its market value. For example: Stocks, Bonds, Certificate of
deposit. By contrast, the price of derivate instruments, such as options,
swaps and futures, is based on the value of their underlying assets.
 Secondary Financial Instruments- It includes the fixed income instrument
such as bonds, debenture, term fixed deposit, preference stock etc., as
well as the variable income instrument such as equity, derivates, mutual
funds etc.
 Financial Services
• Financial intermediaries provide key financial services such as merchant
banking, leasing, hire purchase, credit rating so on.
• Financial services rendered by the financial intermediaries bridge the gap
between lack of knowledge on the part of investors and increasing
sophistication of financial instruments and markets.
 Fund / Asset Based Financial Services – When financial services are used
for creating assets or are supported by assets where the funds are
transformed into assets, they are known as asset based financial services.
 Non-fund / Fee Based Financial Services – Fee based financial services do
not create immediate funds; they enable the creation of funds through
their services for which they charge a fee.
 Chapter-II Merchant Banking
• Rule 2(e) of SEBI (Merchant bankers ) Rules 1992, defines who a merchant
banker is , “ 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, advisor
or rendering corporate advisory services in relation to such issue
management.
 Origin of Merchant Banking
• The origin of merchant banking is to be traced to Italy in late medieval
times and France during the 17th and 18th century
• In England, the merchant banks came on the scene the late 18th and early
19th centuries.
• In London , this banking business is often largely connected with foreign
trade. The oldest merchant banking London was the Baring Brothers.
Other prominent merchant bankers are the Rotheshilds, the Kleinworts,
the Erlangers, the Lazards etc.
• According to Goldsmith , there is a well proven link between economic
growth and financial technology.
Origin of Merchant Banking………..
The Banking commission report in its 1972 has indicated the necessity of
merchant banking service in view the wide industrial base of the Indian
economy.
• State Bank of India -1972
• Bank of India- 1977
• Syndicate Bank- 1977
• Standard Chartered Bank- 1978
• Bank of Baroda-1978
• United Bank of Indi -1980
• Punjab National Bank
• Indian Overseas Bank
• ICICI
• IFCI
• IDBI
• Objectives of Merchant banking

• Channelizing the financial surplus of the general public into productive investments avenues

• Co-coordinating the activities of various intermediaries like the registrar, bankers, advertising

agency, printers, underwriters, brokers, etc., to the share issue

• Ensuring the compliance with rules and regulations governing the securities market
Functions of merchant Banking:
Merchant banking functions in India is the same as merchant banks in UK and other European
countries. The following are the functions of merchant bankers in India.

Corporate counseling
Lease Finance
Fixed Deposits
Project Counseling
Capita l Structuring
Portfolio Management
Issue Management
Credit Syndication
Working capital
Venture Capital
Functions of Merchant Banking…….
• Underwriter- A set of all institutions and agencies that provide a
commitment to take up the issue of securities in the event of a failure of
the issue to get full subscription from the public, are known as ‘
Underwriters’.
• Banker-Bankers who are engaged in the function of acceptance of
applications for shares and debentures along with application money from
investors in respect of issue of securities and also refund of application
money to the applicants to whom securities could not be allotted .
• Broker- Brokers are persons mainly concerned with the procurement of
subscription to the issue from the propective investors.
Challenges Faced by Merchant Banking
 Today’s merchant banks are faced with various challenges..
 The need to constantly innovate and deliver new financial products
to stay one step ahead of the market.
 This has obvious impact on the IT infrastructure , which needs to be
able to integrate new and fast changing products into the bank’s
system.
 Providing an integrated view to and of clients, so that both the bank
and the clients have complete insight into all their relationships in
one window.
challenges faced by merchant bankers in India are

1.SEBI guideline has restricted their operations to Issue Management and Portfolio
Management to some extent. So, the scope of work is limited.

2.In efficiency of the clients are often blamed on to the merchant banks, so they are 13
into trouble without any fault of their own.

3. The net worth requirement is very high in categories I and II specially, so many
professionally experienced person/ organizations cannot come into the picture.

4. Poor New issues market in India is drying up the business of the merchant bankers. Thus
the merchant bankers are those financial intermediary involved with the activity of
transferring capital funds to those borrowers who are interested in borrowing.
Re-organization of Institutional Structure
• From the entry of private financial institutions , the institutional structure
of the Indian System has undergone an outstanding transformation to
reflect the capital market.
• Development /Public Financial Institution (DFI/PFI)
• Commercial Banks
• Non Banking Financial Companies(NBFC)
• Mutual Funds
• Securities/ Capital Market
• Money Market
MERCHANT BANKING AND LEGAL REGULATORY FRAME WORK

Registration with SEBI as Merchant Banker:

Question : Is it mandatory for a merchant banker to register with the SEBI?

Answer: Yes. Without holding a certificate of registration granted by the Securities and

Exchange Board of India, no person can act as a merchant banker.

Question : Who is eligible to obtain registration as a merchant banker?

Answer: Only a body corporate other than a non-banking financial company shall be

eligible to get registration as merchant banker.

Question : What are the various categories for which registration can be obtained?

Answer: The categories for which registration may be granted are given below:

Category I – to carry on the activity of issue management and to act as adviser, consultant,
manager, underwriter, portfolio manager.
Category II - to act as adviser, consultant, co-manager, underwriter, portfolio manager.
Category III - to act as underwriter, adviser or consultant to an issue
Category IV – to act only as adviser or consultant to an issue

Question : What is the capital requirement for carrying on activity as merchant banker?

Answer: The capital requirement depends upon the category. The minimum net worth
requirement for acting as merchant banker is given below:
Category I – Rs. 5 crores
Category II – Rs, 50 lakhs
Category III – Rs. 20 lakhs
Category IV – Nil
Question : What is the procedure for getting registration?

Answer: An application should be submitted to SEBI in Form A of the SEBI (Merchant

Bankers)
Regulations,1992. SEBI shall consider the application and on being satisfied issue a
certificate of registration in Form B of the SEBI (Merchant Bankers) Regulations, 1992.

Question : What is the registration fee payable to SEBI?

Answer: Rs. 5 lakhs which should be paid within 15 days of date of receipt of
intimation regarding grant of certificate
Question : What is the validity period of certificate of registration?
Answer: Three years from the date of issue.

Question : How to renew the certificate?

Answer: Three months before the expiry period, an application should be submitted
to SEBI in Form A of the SEBI (Merchant Bankers) Regulations, 1992. SEBI shall
consider the application and on being satisfied renew certificate of registration for a
further period of 3 years.

Question : What is the renewal fee payable to SEBI?

Answer: Rs.2.5 lakhs which should be paid within 15 days of date of receipt of
intimation regarding renewal of certificate.

Question : What is the consequence of non-registration or failure to renew

registration?
Answer: The person whose registration is not current shall not carry on the activity as
merchant banker from the date of expiry of validity period.
Legal and Regulatory Framework
• Regulation of Merchant Banking ensures the smooth functioning of
following
• The merchant banker’s regulations , which regulate the raising of
funds in the primary market, would assure for the issuer market for
raising resources at low cost, effectively and easily, ensure high
degree of protection of investors interest.
• The regulations provide for the merchant bankers a dynamic and
competitive market with the high standard of professional
competence, dignity, integrity and solvency.
Legal and Regulatory Framework
• The regulations promote a primary market, which is fair , efficient
and flexible and inspire confident.
• The merchant banking activity in India is governed by SEBI
regulations 1992. Registration with SEBI is mandatory to carry-out
the business of merchant banking in India .An Applicant should
comply with the following norms:
• The applicant should be a Corporate body
• The applicant should not carry on any business other than those
connected with the securities market.
Legal and Regulatory Framework
• 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.
• Any associate company , group company, subsidiary or inter connected
company of the applicant should not have been a registered merchant
banker.
• The applicant should not have been involved in any securities scam or
provided guilt for any offense.
• The applicant should have a minimum net worth Rs 50 million.
Following are the SEBI regulations on Merchant Banking
1. Registration of Merchant Banker’s
2. Responsibilities of Merchant Banker’s
3. Procedure for Inspection
4. Procedure for Action in Case of Default
5. Amendments to SEBI (Merchant Bankers) Regulations, 1992
Registration of Merchant Banker’s
• Categories of Merchant Banker’s
• Requirement for Granting of Certificate
• Capital Adequacy Requirements
• Procedure of Registration
• Renewal of Certificate
Categories of Merchant Banker’s
(i) Category I
• To carry on any activity of the issue management , which will consist
of preparation of prospects and other information relating to the
issue , determining financial structure , tie-up of financiers and final
allotment and refund of the subscription.
• To act as adviser, consultant, manager, underwriter , portfolio
manager
Categories of Merchant Banker’s
• (ii) Category II : To act as adviser , Consultant, Co-manager,
underwriter, portfolio manager.
• (iii) Category III : To act as underwriter, adviser, and consultant to
an issue.
• (iv) Category IV : To act only as adviser or consultant to an issue.
Merchant bankers of categories II,III,IV were abolished through an
amendment , dated December 9,1997 to the SEBI Merchant bankers
regulation 1992.
Requirements for Granting of Certificate
The applicant is:
 Shall be body corporate other than an NBFC.
 Has the necessary infrastructure to effectively discharge his activities.
 Should have minimum two experienced employees to conduct the
business of the merchant banker.
 Should fulfill the capital adequacy requirement as specified.
 His partner ,director or principal officer should not be involved in any
litigation connected with the securities market which has an adverse
bearing on the business of the applicant .
Requirements for Granting of Certificate
• Should have the professional qualification from the institution
recognized by the government in finance , law or business
management.
• Should be fit and a proper person.
Capital Adequacy Requirement
• The Capital Adequacy Requirement(CAR) shall not be less than the
net worth of the person making the application for grant of
registration.
• The net worth shall be as follows, namely

Category Minimum Amount

Category I Rs 5,00,00,000
Category II Rs 50,00,000
Category III Rs 20,00,000
Category IV NIL
Procedure for Registration
• The SEBI on being satisfied that the applicant is eligible shall grant a
certificate in a FORM B.
• On the grant of a certificate the applicant shall be liable to pay the
fees in accordance with Schedule II as shown below
Merchant Banker Initial Fees for 2 years Continuation Fees
Category I Rs 2.5 lac Rs 1 lac
Category II Rs 1 lac Rs 50,000
Category III Rs 1 lac Rs 25,000
Category IV Rs 5,000 Rs1,000
Renewal of Certificate
• Three months before expiry of the period of certificate, the
merchant banker, may if he so desires , make an application for
renewal in Form A.
• The application for renewal shall be dealt within the same manner as
if it were a fresh application for grant of a certificate.
• The SEBI on being satisfied that the applicant is eligible for renewal
of certificate shall grant a certificate in Form B and send intimation
to the applicant.
Renewal of Certificate……….
• On a grant of a certificate the applicant shall be liable to pay the
fees in accordance with Schedule II as shown below

Merchant Banker Initial Fees for 2 Continuation Fees

Years
Category I RS 1 lac Rs 20,000
Category II Rs 75,000 Rs 10,000
Category III Rs 50,000 Rs 5,000
Category IV Rs 5,000 Rs2,500
 Responsibilities of Merchant Banker’s
• Code of Conduct
• Maintenance of Books of Accounts, Records etc.
• Submission of Half yearly Results
• Appointment of Lead Merchant Bankers
• Restriction on Appointment of Lead Merchant Bankers
• Responsibilities of Lead Merchant Bankers
• Underwriting Obligations
• Appointment of Compliance Officers
 Code of Conduct
• Every merchant Banker shall abide by the code of conduct as
specified in Schedule III.
• No Merchant Banker, other than a bank or a public financial
institution, who has been granted of registration under these
regulations, shall after June 30th 1998 carry on any business other
than that in the securities market.
• A Merchant banker, who has been granted certificate of registration
to act as primary dealer by Reserve Bank of India , may carry on
such business as may be permitted by Reserve bank of India.
 Maintenance of Banks of Accounts, Records etc
• Every Merchant Banker shall keep and maintain the following books
of accounts, records and documents namely:
a) A copy of balance sheet and P&L account as at the end of each
accounting period.
b) A copy of the auditor’s report on the accounts for that period.
c) A statement of financial position.
d) Every Merchant Banker shall intimate to the SEBI the place where
the books of accounts, records and documents are maintained.
 Submission of Half Yearly Results
• Every Merchant Banker shall furnish to the SEBI, Half yearly
unaudited financial results when required by SEBI with a view to
monitor the capital adequacy of the merchant banker
 Appointment of Lead Merchant Bankers
• All issues should be managed by at least one merchant banker
functioning as the lead merchant banker.
• Every Lead Manager shall before taking up the assignment relating
to an issue, enter into an agreement with such body-corporate
setting out their mutual rights, liabilities and obligations relating to
such issue and in particular to disclosures, allotment and refund
Restriction on Appointment of Lead Merchant Bankers.
• The number of lead merchant bankers may not, exceed in case of any
issue of Size of issue No of Merchant bankers.
a) Less than rupees fifty crore- 2
b) Rupees fifty crore but less than rupees one hundred crore – 3
c) Rupees one hundred crore but less than rupees two hundred crore-4
d) Rupees two hundred crore but less than rupees four hundred crore -5
e) Above Rupees four hundred crore- Five or more as may be agreed by
the SEBI
 Responsibilities of Lead Merchant Bankers
• No Lead manager shall agree to manage or be associated with any
issue unless his responsibilities relating to the issue mainly, those
of disclosures, allotment and refund are clearly defined, allocated
and determined and a statement specifying such responsibilities is
furnished to the SEBI at least one month before the opening of the
issue for subscription.
• In case there is more than one lead merchant banker , the
responsibilities should be clearly mentioned.
 Underwriting Obligations
• In respect of every issue to be managed , the lead merchant banker
holding a certificate under Category I shall accept a minimum
underwriting obligation of five percent of the total underwriting
commitment or rupees five lac whichever is less
 Appointment of Compliance Officers
• Every merchant banker shall appoint a compliance officer who shall
be responsible for monitoring the compliance of the Act, rules and
regulations, notifications, guidelines ,instructions ,etc., issued by the
SEBI or the Central Government and for redressal of investors
grievances
 Procedure For Inspection
• SEBI’s Right to Inspect
• Notice Before Inspection
• Submission of Reports to the SEBI
• Action on Inspection or Investigation Report
• Appointment of Auditors
 Procedure for Action in Case of Default
• Suspension of Registration
• Cancellation of Registration
• Shoe-Cause Notice and Order
• Effect of Suspension and Cancellation of Registration of Merchant
Bankers
• Publication of Order of Suspension
 Security Contract Regulation Act(SCRA)
• The SCRA was passed in 1956 by Parliament and it came into force
in February 1957.
• An act to prevent undesirable transactions in securities by
regulating the business of dealing therein, by providing for certain
other matters connected therewith.
A. It extends to the whole of India
B. It shall come into force on such date as the Central Government
may, by notification in the Official Gazette appoint.
 Foreign Exchange Management Act(FEMA)1999
• The Foreign exchange Management Act (FEMA)1999, replaced the
Foreign Exchange Act(FERA).1973, which regulated the foreign
exchange transactions in India and which sought to control certain
aspects of the conduct of business outside the country by Indian
Companies and in India by foreign companies.
• The FEMA, which came in to effect from January ,1 ,2000,extends to
the whole of India and also applies to all branches, offices and
agencies outside India, owned or controlled by a person resident in
India.
 Objectives of FEMA
• To facilitate external trade and payments.
• To promote the orderly development and maintenance of foreign
market.
 Scope of FEMA
• Free transactions on current account subject to reasonable
restrictions that may be imposed.
• RBI controls over capital account transactions.
• Control over realization of export proceeds
• Dealing in foreign exchange through authorized persons like
authorized dealer / money changer / off shore banking unit.
Merchant Banking Relations With Stock Exchanges

• NSE
• BSE
• OCTEI (Over the Counter Exchange of India)