Financial Services:

An Introduction

Financial Services ?
Financial services: ensures smooth flow of

financial activities in the economy

It

includes: Banking, Insurance, Stock

Broking and Investment Services, as well
as Business and Professional Services.

Cater the needs of Financial Institutions,

Financial
Markets
Instruments

and

Financial
2

Financial Services ?
Financial

services include the

services offered by both Asset
Management
companies
and
Liability Management companies

Financial Services help to raise the

required funds but also ensure

their efficient deployment
3

Financial Services ?
To ensure an efficient management of

funds, services such as bill discounting,

factoring of debtors, parking of short
term funds in money market, ecommerce and securitization of debts
are provided by financial service firms
This sector provides services such as
banking, insurance, credit rating, lease
financing, factoring, venture capital,
mutual funds, merchant banking, stock
lending, depository services, housing
finance
4

FEATURES OF FINANCIAL
SERVICES
Customer-Specific: Focused, need of

the customer, due regard to cost,

liquidity and maturity consideration

Intangibility:

Quality
and
innovativeness of their services to
build up their credibility

Concomitant: Production of new and

innovative financial services and

supplying of these services are to be
performed simultaneously

FEATURES OF FINANCIAL
SERVICES
Tendency

to
Perish:
Proper
synchronization of demand and supply

People based services: People incentive

and hence its subjected to variability of

performance or quality of service

Market Dynamics: Constantly redefined

and refined taking into consideration of

various dynamics in financial services

Types of financial
services

Financial services industry

classifying the financial services

under three broad categories
Fee Based services
Fund Based services
Insurance Services
7

Fee Based Services

Financial institutions operate in specialized fields to

earn a substantial income by way of fees, dividend

commission, discount and brokerage on operations.

Issue Management
Corporate Advisory Services
Credit Rating
Mutual Funds
Assets Securitization

Fund Based Services

The firm raises funds through equity, debt, and

deposits and invests these funds in securities

or lends to those who are in need of capital

Leasing and Hire Purchase

Hosing Finance
Credit Cards
Venture Capital
Factoring
Forfaiting
Bill Discounting
9

Merchant Banking-An
Overview
Companies raise capital by issuing

securities in the market. Merchant

bankers act as intermediaries
between the issuers of capital and
the ultimate investors who purchase
these securities.

Merchant Banking-An
Overview
Merchant
banking
is
the
financial
intermediation that matches the entities that need
capital and those that have capital. It is a function
that facilitates the flow of capital in the market.
Ministry of Finance: 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 service in
relation to such issue management

12

MERCHANT BANKING
Merchant banking may be defined as
an institution which covers a wide
range of activities such as
underwriting of shares, portfolio
management, project counseling,
insurance etcThey render all these
services for a fee
13

Merchant Banking-An
Overview
Banking commission Report-1972

a) Necessity
b) Distinct from commercial

Banks
c) Investment Management
and Advisory services
d) Medium and small savers
14

MERCHANT BANKING :
ORIGIN & GROWTH
Italy: Medieval Period
: With Introduction of Bills of
Exchange
into England,
: including all Institutions
& Techniques connected with
Money
Market

MERCHANT BANKING :
ORIGIN & GROWTH
France:

In Seventeenth &

Eighteenth
Century as Trader or
Entrepreneur
Who were investing their accumulated

profits in Banking Business

MERCHANT BANKING :

France:
Concentrating on money exchanges

locally
*Remitters of Money
*Merchant Broker
Engaged in Bill Broking
Raising Foreign Exchange
Provision for Long term Capital for
Public Borrowings

MERCHANT BANKING :

France:
Financing Foreign Trade
Issue of Capital
Managing Individual Funds
Undertaking foreign Securities Business

& Foreign Loan Business

Financing Sovereign Govts
Since end of II World War Commercial
Banks in Western Europe offering MB
Services, along with their usual services

MERCHANT BANKING IN

UK

In late 18th and early 19th Century

Industrial Revolution in England into

powerful trading zone

Rich Merchants diversified towards
Banking activites
Acceptance of Commercial Bills of
Domestic & International Trade(Issue
Houses, Acceptance Houses,
Discount Houses)

MERCHANT BANKING IN

USA

During 1880s & early 1900

European & English Merchant

Bankers were meeting financial

requirement of Rail Road Project
International Trade
Expansion of Trade & Commerce
Capital for Industrial Projects
Issue of Securities

MERCHANT BANKING IN

USA

Launching of Industrial Projects

Investment Banking in 1920

*Corp. Securities,
*Trading & Investment,
*New Issues Management)
Crash of 1929 and Depression
restricted
*Investment Banking
*Commercial Banking

MERCHANT BANKING
IN INDIA

Grindleys
Bank
-1967

RBI Permitted
*Mgt of Cap. Issues
*Assessement of financial requirements of
new Entrepreneurs
*Financial Services covering Product
Planning to Marketing Research
*Mgt. Consultancy Services to Large &
Medium size Companies
*

CITI BANK-1970
Assisting New & Existing

Entrepreneurs
Evaluation of Projects
Raising Fund through Borrowing
Issue of Equity Capital
Management Consultancy

ENTRY OF
INDIAN BANKS
TO MERCHANT BANKING

SBI
1972
ICICI BANK 1973
CENTRAL BANK, BANK OF INDIA,

SYNDICATE BANK
1977
BOB,ST CHARTERED BANK,
1978
UBI, UCB, PNB, CANARA BANK, IOB
1980
IFCI
1986

MERCHANT BANKERS
REGULATED
BY
SEBI Guidelines

Companies Act,1956
Securities Contract and

Regulations Act,1956

SEBI (MB) Regulations,

1992
Code of Conduct
for MB
Observe high standards of
integrity and fairness in all his
dealings.
Render high standard of service,
exercise due diligence, proper
care, exercise independent
judgment & disclose conflict of
interest while providing unbiased
service. Financial Markets and Services Kiran Bindu

MERCHANT BANKING
ACTIVITIES IN INDIA
CORPORATE COU NSELLING
PROJECT COUNSELLING/APPRAISAL
PRE-INVESTMENT STUDIES
CREDIT SINDICATION
PROJECT FINANCING
ISSUE MANAGEMENT
UNDERWRITTING
PORTFOLIO MANAGEMENT

MERCHANT BANKING
ACTIVITIES IN INDIA
VENTURE CAPITAL FINANCING
LEASING
BILLS DISCOUNTING/ACCEPTANCE

OF CREDIT
ADVISOR ON
*MERGERS
*AMALGAMATIONS
* TAKEOVERS

MERCHANT BANKING
ACTIVITIES IN INDIA
ARRANGING OFF-SHORE FINANCING
FIXED DEPOSIT BROKING
RELIEF OF SICK-INDUSTRIES

*ASSESSMENT OF CAPITAL
REQUIREMENTS
*CAPITAL RESTRUCTURING
*

Regulation
Merchant Bankers Regulations of

Securities and Exchange Board of India

Company Act 1956
Listing guidelines of Stock Exchanges
Securities Contracts (Regulation) Act,
1956
Formation of divisions
Subsidiaries companies

Structure
Category-I
to carry on any activity of the issue

management, which will inter-alia consist

of preparation of prospectus and other
information relating to the issue,
determining financial structure, tie-up of
financiers and final allotment and refund of
the subscription; and
to act as adviser, consultant, manager,

underwriter, portfolio manager.

Structure
Category II
that is, to act as adviser, consultant, co-

manager, underwriter, portfolio manager;

Category III
that is to act as underwriter, adviser,

consultant to an issue;

Category IV
that is to act only as adviser or

consultant to an issue.

Registration with SEBI

Around 250 Merchant Bankers
Abolished all categories and

maintained Category-I
Separate registration for
underwriters and portfolio manager
Segregation between fee based and
Fund based activities

Registration with SEBI

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 body

corporate
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.

Registration with SEBI

The applicant must have at least two

employees with prior experience in

merchant banking
Any associate company, group company,
subsidiary or interconnected company of
the applicant should not have been a
registered merchant banker
The applicant should not have been
involved in any securities scam or
proved guilt for any offence
The applicant should have a minimum
net worth of Rs.5 crores

Authorized Activities
Issue Management
Preparation of prospectus
Information relating to the issue

Determining financing structure

Tie-up of finances and final allotment

and/or refund of subscription

Corporate advisors to the issue
Consultants or advisors to issue and
underwriting

Terms of Authorization
Authorization is valid for an initial period of 3 years
Authorization fee, annual fee and renewal fee
All issues should be managed by at least one

authorized merchant bankers, functioning as sole

manager or lead manager
MB expected to exercise due diligence independently
Involvement of MB in post-issue management
Adhere a code of conduct prescribed by SEBI
MB may be cancelled or suspended for suitable
duration
MB regulations integrate issue management with
underwriting

General Obligations and

Responsibilities
Maintenance of books of accounts, records

and documents
Copy of the balance sheet, auditors report
and statement of financial position
Responsibilities of lead Manager
Underwriting obligation
Submission of due diligence certificate
Insider Trading
Acquisition of shares

Main functions of a
merchant banker
Management of debt and equity

offerings-

This forms the main function of the

merchant banker. He assists the companies in raising funds
from the market. The main areas of work in this regard
include: instrument designing, pricing the issue, registration
of the offer document, underwriting support, marketing of
the issue, allotment and refund, listing on stock exchanges.

Placement and distribution-

The merchant
banker helps in distributing various securities like equity
shares, debt instruments, mutual fund products, fixed
deposits, insurance products, commercial paper to name a
few. The distribution network of the merchant banker can be
classified as institutional and retail in nature.

Functions
Corporate advisory services

Merchant bankers offer customized solutions to their clients

financial problems. The following are the main areas in which
their advice is sought:

Financial structuring includes determining the right debtequity ratio and gearing ratio for the client, the appropriate
capital structure theory is also framed.

Merchant bankers also explore the refinancing alternatives of

the client, and evaluate cheaper sources of funds.

Another area of advice is rehabilitation and turnaround

management. In case of sick units, merchant bankers may
design a revival package in coordination with banks and
financial institutions.

Risk management is another area where advice from a

merchant banker is sought. He advises the client on different
hedging strategies and suggests the appropriate strategy.

Functions
Project advisory services conceptualizing the project idea
feasibility studies
Preparing different documents like the detailed project
report.

Loan syndication Tie up loans for their clients

Analyze the pattern of the clients cash flows
Prepares a detailed loan memorandum This takes

place in a series of steps. Firstly they, based on

which the terms of borrowings can be defined. Then
the merchant banker, which is circulated to various
banks and financial institutions and they are invited
to participate in the syndicate.

SERVICES OF MERCHANT BANKERS

PROJECT COUNSELLING :
It includes preparation of project reports,deciding upon the
financing pattern, appraising the project relating to its
technical, commercial and financial viability. It includes filling
up of application forms for obtaining funds from financial
institutions.
LOAN SYNDICATION :
Assistance is rendered to raise loans for projects after
determining promoters contribution. These loans can be
obtained from a single institution or a consortium.

ISSUE MANAGEMENT :
Management of issues involves marketing of corporate securities
ieequity shares, preference shares and debentures by offering
them to public.
Pre-issue activities:
They prepare copies of prospectus and send it to to SEBI and then
file them to Registrar of Companies
They conduct meetings with company representatives and
advertising agencies to decide upon the date of opening of issue,
closing of issue, launching & publicity campaign etc..
They help the companies in fixing up the prices for their issues
Post-issue activities:
It includes collection of application forms, screening of applications,
deciding allotment procedure, mailing of allotment letters, and
refund orders

UNDERWRITING OF PUBLIC ISSUES :

Underwriting is an insurance to the company which makes
public issues. Raising of external resources is easy for the
issues backed by well known underwriters.

MANAGERS,CONSULTANTS OR ADVISERS TO THE

ISSUE :
SEBI insist that all issues should be managed by atleast one
authorised merchant banker but not more than two. For an issue
of 100 crores, upto a maximum of four merchant bankers shall
be appointed. They help in listing of shares in stock exchange,
completion of formalities under Companies Act etc..

PORTFOLIO MANAGEMENT :
Portfolio refers to investment in different kinds of securities
such as shares, debenture issued by different companies. It is
a combination of assets but a carefully blended asset
combination.
Portfolio management refers to maintaining proper
combination of securities in a manner that they give
maximum return
Investors are interested in safety, liquidity and profitability of
his investment but they cant choose the appropriate
securities. So merchant bankers help their investors in
choosing the shares. They conduct regular market and
economic surveys.

NRI INVESTMENT :
NRIs has to follow lots of complicated rules for investing in the
shares in India.Merchant bankers help them in choosing the shares
and offer expert advice fulfilling government regulations thus
mobilising more resources for corporate sector.
ADVISORY SERVICE RELATING TO MERGERS AND
TAKEOVERS :
Merger is a combination of two or more companies into a singe
company where one survives and other loses its existence
Takeover is the purchase by one company acquiring controlling
interest in the share capital of another company
Merchant banker acts as middlemen between offeror and
offeree,negotiates mode of payment and gets approval from
government.

OFF SHORE FINANCE :

Merchant bankers help their clients in :
Long term foreign currency loan
Joint venture abroad
Financing exports and imports
Foreign collaboration arrangement

BANKS PROVIDING MERCHANT BANKING SERVICES

IN INDIA

Commercial banks
Foreign banks like National Grindlays Bank, Citibank, HSBC
bank etc..
Development banks like ICICI,IFCI,IDBI etc..
SFC , SIDCs
Private firms like JM Financial and Investment service , DSP
Financial Consultants, Ceat Financial Services, Kotak Mahindra,
VMC Project Technologies, Morgan Stanley, Jardie Fleming,
Klienwort Benson etc

SOME PROBLEMS OF MERCHANT BANKERS

SEBI stipulates high capital adequacy norms for
authorisation
which
prevents
young,
specialised
professionals into merchant banking business
Non co-operation of the issuing companies in timely
allotment of securities and refund of application of money
etc.. is another problem
Yet merchant banking is vast but should develop
adequate expertise to provide a full range of merchant
banking services