MBA: Finance

Merchant Banking

Amulyadhan Rout
Merchant Banking
Definition
Merchant Banking can be defined as a skill-oriented professional
service provided by Financial Institutions /Merchant Banks to
their clients concerning their financial needs, for adequate
consideration by charging them fees.

 Merchant banks are a specialist in international trade and

thus, excel in transacting with large enterprises.
 In modern British usage it is the same as an investment bank.
 Unlike retail or commercial banks, merchant banks do not
provide all kinds of financial services to the general public.
Merchant Banking
Evolution
Merchant banks were the first modern banks and evolved from
medieval merchants who traded in commodities,
 The origin of merchant banking can trace back to the 13th
century when a few families owned and managed firms
engaged in the sale and purchase of commodities were also
found to engage in banking activity.
 These firms not only acted as bankers to the kings of
European States, financed coastal trade but also borne
exchange risk.
 “Hundi” was the main instrument of credit used by
indigenous bankers before the coming of western merchants
in India.
 It was in 1813 when merchants came from European countries
to trade with India.
 Agency houses were set up by merchant bankers based in
London.
Merchant Banking
Governance:
Securities and Exchange Board of India (SEBI) is the
regulatory authority for merchant banking in India.

 Activities of merchant banks are regulated by the SEBI

(Merchant Bankers) Regulations, 1992.
 As per RBI, banks are allowed to undertake merchant banking
activities through a separate subsidiary which would be
required to comply with SEBI regulations
 Banking Institutions performing merchant banking activities
are also required to follow the requirements laid down in the 
prudential exposure norms prescribed by RBI, as well as the
statutory limits contained in Section 19(2) & (3) of the Banking
Regulation Act, 1949.
 Merchant banking can also be pursued by entities other than
banks (however, they should not be NBFCs as defined under
the RBI Act), provided they are registered with SEBI. 
Merchant Banking
Governance:
However, RBI exempts a merchant banking company from
following requirements:
 Provisions related to mandatory registration, maintenance of
liquid assets and creation of reserve funds under the RBI Act,
1934;
 Non-Banking Financial Companies Acceptance of Public
Deposits (Reserve Bank) Directions, 1998; and
 Non-Banking Financial Companies Prudential Norms
(Reserve Bank) Directions, 1998.
Merchant Banking
Governance:
To be eligible for the above exemptions, a merchant
banking company would need to fulfil the following
criteria:
a. It should be registered with SEBI under section 12 of the
SEBI Act 1992;
b. It should conduct the business of merchant banking in
accordance with rules or regulations framed by SEBI;
c. It should acquire securities only as part of its merchant
banking activities;
d. It should not be engaged in any other financial activities as
mentioned in section 45I(c) of the RBI Act 1934; and
e. It should not accept or hold public deposits.
Merchant Banking
Governance:
Following are some of the requirements which are taken
into consideration for grant of certificate:
a. Applicant should be a corporate body other than a Non-
Banking Financial Company (as defined under the RBI Act);
b. Applicant should not engage in any activity other than
those connected to securities market;
c. Applicant should have a minimum of two employees
having prior experience in merchant banking;
d. Applicant must not be related (directly or indirectly) to any
other entity which is registered as a merchant banker;
e. Applicant has not been found guilty for any economic
offence; and
f. Applicant should have a minimum capital of 5 crore rupees
(for category-I merchant banker).
Merchant Banking
Category of Merchant Banks

SEBI has prescribed capital adequacy norms for

registration of the various categories of merchant bankers.

There are four categories of Merchant Banks in India.

a. Category I
b. Category II
c. Category III
d. Category IV
Merchant Banking
Category of Merchant Banks (Contd..)
a. Category I :
It can carry on all activities relating to management of
issues such as preparation of prospectus, determining
financial structure, conduct of market surveys, raising
funds from capital market, raising of funds through new
instruments, arranging bought out deals and to provide
advice on:  merger & acquisition, loan syndication,
technology tie-ups, working capital finance, venture
capital, lease finance, fixed deposit management, factoring,
portfolio management of mutual funds, rehabilitation of
sick units etc.
.

Merchant Banking
Category of Merchant Banks (Contd..)

b. Category II :
It can act as advisor, consultant, co-manager, under writer,
and portfolio manager.

c. Category III :
It can act as underwriter, advisor and consultant to an
issue.

d. Category III :
It can act only as advisor or consultant to an issue.
Merchant Banking
Major Merchant Banks of India
There are more than 200 Merchant Banks of India
Famous Merchant Banks are:
 Axis Capital Ltd.
 DSP Merrill Lynch Ltd
 Edelweiss Financial Services Ltd.
 HDFC Securities Ltd.
 ICICI Securities Ltd.
 IDBI Capital Markets & Securities Ltd.
 J M Financial Ltd
 J P Morgan India Pvt. Ltd
 Kotak Mahindra India Capital Ltd
 L&T Financial Consultants Ltd
 SBI Capital Markets Ltd
Merchant Bank vs Investment Bank
Investment Banks are set up to help the clients, i.e.
Companies, High net-worth individuals (HNI) and
government in arranging capital.

 They act as a financial intermediary between the Company

requiring capital and the investors and in this way, the
savings are turned into investments.
 Further, they generate revenue from dealer and brokerage
activities, corporate restructuring, financial engineering,
speculation and arbitrage, corporate finance and treasury
management.
 It provides a number of services to its clients such as
underwriting of shares and bonds, selling and trading of
securities, advisory services for mergers and acquisitions,
divestiture, IPO and managing the assets.
Merchant Bank vs Investment Bank
Difference between Merchant Bank vs Investment Bank
BASIS FOR MERCHANT BANK INVESTMENT BANK
COMPARISON (I BANK)

Meaning Banking institution, that Investment Banks are the

fulfills capital requirements of
the companies in the form of
share ownership, rather than
granting loans.
middleman between the
issuer of securities and the
investing public, and also
provides various financial
services to the clients.

Deals with International financing Underwriting and issuance

activities of securities

Based on Fee based Fee based and fund based

Trade financing Offered to the clients Rarely provided

Supports Small companies Large companies

Merchant Bank vs Investment Bank
Some of the major investment banks that are operating
internationally are:
 Goldman Sachs
 Credit Suisse
 Morgan Stanley
 Bank of America
 Merrill Lynch
Deutsche Bank etc.
Merchant Banking
Range of Financial and Consultancy services offered:
a. Issue Management (Marketing, managing and
underwriting of the public issue)
b. Merger, Acquisition & Advisory & related services.
c. Disinvestment Advisory Services
d. Project Advisory & Loan Syndication.
e. Security Advisory Services.
f. Project Promotion and Project Finance.
g. Investment Banking.
h. Portfolio Services.
i. Infrastructure Advisory Services.
Merchant Banking
Range of Financial and Consultancy services offered:
j. Management Consulting Services.
k. Capital Market Services including brooking.
l. International financial advisory services.
m. Satellite dealership of government securities.
n. Business Valuation
o. Financial Due Diligence.
p. Preparation of Request for Qualification, Request for
Participation, Bid Advisory, Financial Appraisal Report,
Information Memorandum, Offer Document, Draft Red
Herring Prospectus
Merchant Banking
a. Issue Management (Marketing, managing and underwriting
of the public issue)
Role of Merchant Bankers in Issue Management
 Guiding the Company for floating Public Issue
 Preparation of Financial Appraisal Report /Information
Memorandum
 Preparation of Draft Red Herring Prospectus
 Financial Due Diligence
 Filing Application with SEBI
 Clearance from SEBI
 Marketing & Road Show
 Share allocation
Merchant Banking
b. Merger, Acquisition & Advisory & related services.

 Initiate contact with Target(s) Company to assess their prima

facie interest
 Develop non disclosure terms
 Arrange management meetings with promoters of Target(s)
Company
 Provide support for Commercial and Financial due diligence of
Target(s) Company
 Valuation of the business of Target(s) Company
 Assistance in negotiation with Target(s) Company on value
and structure of the deal
 Assistance in preparation of term sheet with Target(s)
Company, finalising terms & conditions of purchase agreement
 Deal closure with best possible valuation and terms for buyer
and seller.
Merchant Banking
c. Disinvestment Advisory Services:

 Preparation of Request for Qualification (RFQ) document,

including
• Definition of qualification criteria
• Statement of Qualification document
• Advertisement to be published in journals, newspapers and
other publications
• Brief Information pack on Company /Corporation to be
disinvested
• Other related documents

 Identification, interaction and discussions with potential Bidders:

• Identification of Potential bidders
• Create awareness of acquisition opportunities among identified
Bidders through client interaction, presentations on AAGL etc.
• Elicit a positive response towards the disinvestment process.
• Elicit increased participation of major domestic and overseas
Bidders in the Disinvestment process
Merchant Banking
c. Disinvestment Advisory Services:

 Assistance to Government in evaluation of the Bidders

• Assistance in organizing the pre-bid conference for Bidders and
in preparation of replies to all queries of the Bidders
• Assistance in preparation of a presentation on AAGL, to be
presented to the Bidders in the pre-bid conference
• Assistance in evaluation of RFQ Proposals to select of Eligible
Bidders, for stage two of the disinvestment process, by way of
establishing the qualification criteria & proposal evaluation
methodology and evaluation of the proposals
Financial Markets
Types of Financial Markets

a. Money Market
b. Capital Markets
c. Over The Trade Counter Markets
d. Derivatives Markets
e. Foreign Exchange Markets
f. Commodity Markets
g. Insurance Markets
Functions of Financial Markets
Financial Markets
Importance of Financial Markets

There are many things that financial markets make possible,

including the following:
 Financial markets provide a place where participants like
investors and debtors, regardless of their size, will receive fair
and proper treatment.
 They provide individuals, companies, and government
organizations with access to capital.
 Financial markets help lower the unemployment rate because
of the many job opportunities it offers
Thank You