Module 4

Merchant Banking and NonBanking Finance Companies

Merchant Banking
Rule 2(e) of SEBI (Merchant Bankers) Rules1992,
Defines: who a merchant bankers 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 traced in Italy , in
medieval times
The oldest merchant bank in London was Baring
Brothers
The first merchant banking was started by Grindlays
Bank in 1970.
After the recommendation of banking Commission,
1972, all the Indian banks got permission for starting
merchant banking services as a part of their multiple
services they could offer to their clients.
Examples: Bank of Baroda, Punjab National , Canara
Bank etc.

Features of Merchant Banking

Merchant banks are mainly concerned with long-term
financing of business enterprises and marketing of
stocks and bonds.
It may contract with the issuing company to distribute
an issue on the best efforts basis.
It may act as an agent in the direct placement of the
issue of securities with one or limited number of
investing institutions.
Merchant bankers render expert advice on the type
and form of securities that will appeal to investors.

Objective
It is to help for capital formation
It creates a secondary market to boost the industrial
activities in the nation
It assists and promote economic Endeavour
They provide seed capital to new concerns.
Provides financial clearance
Help to mobilize funds from public.
They are mainly involved in issue management
It prepares project reports, conduct market research
and pre investment surveys.

Services Rendered by Merchant bankers

corporate counseling
Loan syndication
Corporate advisory
services
Leasing
Advisory services to
mergers and takeover

Project counseling
Management of capital
issues
Portfolio management
Foreign currency
financing
Providing venture
capital Financing

SEBI guidelines for Merchant Bankers

SEBI Regulation of merchant banking:
1). Registration of merchant bankers
2). Responsibilities of merchant bankers
3). Procedure for inspection
4). Procedure for action in case of default
5). Amendments to SEBI regulations, 1992

 Registration of merchant bankers

1)Categories of merchant bankers:
category 1: To act as adviser
category 2: To act as consultant, co-manager
category 3: To act as underwriter
category 4: To act as portfolio manager

2)Requirements for granting of certificate

3) capital adequacy requirements
4) procedure for registration
5) renewal of certificate

 Responsibilities of merchant bankers

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
Underwriting obligations

 Procedure for inspection

SEBI s right to inspect

Notice before inspection
Submission of reports to the SEBI
Action on inspection
Appointment of auditors

 Procedure for action in case of default

Suspension of registration
Cancellation of registration
Show-cause notice and order
Effect of suspension and cancellation of
registration of merchant bankers
Publication of orders of suspension

 Amendments to SEBI regulations,1992

The SEBI regulations, 1992have been amended on
December 9, 1997 to provide that:
1) The applicant should be a fit and proper person;
2) A merchant banker has to seek separate registration
for its underwriting or portfolio management
activities;
3) The categorization of merchant bankers 1,2,3 &4
has been dispensed with;
4) The applicant should be a corporate body other than
non-banking finance company.

Non Banking financial companies

According to the reserve (Amendment Act) 1997,
A non banking institution which is a company and
which has as its principal business the receiving of
deposits under any scheme or arrangement or in
any other manner or lending in any manner;

Functions of NBFCs
Mobilization of Saving

Provision of easy, simple and adequate credit

Acting as financial Supermarket
Channelising Funds for Productive Purposes
Encouraging Thrift and development savings habit
Providing Housing finance
Increasing the Standard of living
Promoting Economic Development

Types of NBFCs
Equipment leasing
company (ELC)

Hire-purchase finance
company (HPFC)

Housing Finance
company (HFC)

Investment company
(IC)

Loan company (LC)

Miscellaneous company
(MC)

Non-banking NonFinancial company

(NBNFC)

Residuary company
(RC)

RBI Guidelines for NBFCs

The salient features of these guidelines are as
follows:
1) NBFCs with net owned funds of rs 50 lac and above
are required to register with RBI. The registered
companies are to submit the necessary information
to the RBI in the prescribed format.
2) Inter-corporate deposits, borrowings and monies
received from the directors of private companies
are to be treated as regulated deposits.
3) Hire purchase companies and equipment leasing
companies are required to maintain liquid assets at
10 % on the revised definition of deposits, which
include inter-corporate deposits.

4) Loans and investment companies are required to

maintain liquid assets to the extent of 5% of
deposits
5) For residuary NBFCs, the minimum period of
deposit will be 12 months and maximum period of
deposit 84 month
6) All accounting standards and guidance noted
issued by the Institute of chartered Accountants of
India dealing with lease accounting, depreciation,
etc ., may be followed

Prudential Norms for NBFCs

Income Recognition
Income from investment
Accounting standards
Accounting for investment
Provision requirements
Disclosure in balance sheet
Constitution Adequacy Requirements

Thank you..
Done by: Harshitha
Saleem
Arun Kumar
Mani kanta
Brunda