Merchant Banking

Prof. Anil Kalra

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Merchant Banking: Origin
 Historical perspective
 Merchant banking: services arranging support, knowledge and
resources to individuals and organizations for starting, expanding and
sustaining their businesses and investments
 Overlapping Functions: Merchant Banks, Development Banks,
Commercial Banks and Investment Banks
 Investment Banks: channelise savings into investments by helping
business entities raise funds from the capital markets and offer gamut
of services including corporate mergers and acquisitions
 Development Banks: undertake business promotional activity and
extend long term project finance
 Merchant Banks: package of services, mostly fee based for credit
syndication, portfolio management, IPO management, advisory on
business and industry, arrange funding by PE, VC, bridge financing,
angel financing, mutual funds, pension funds, structured debt/ equity,
in domestic/ international markets

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 Merchant Banking in India
 Merchant banking started in India in the nineteenth
century with the establishment of agency houses of
London-based merchant banks-primarily engaged in
overseas trade and commerce
 Managing Agency: prevalent in Pre-independence India-
big boost to merchant banking, emergence of corporate
sector
 Merchant banking as a specialized business started in
India with the establishment of the merchant banking
division of National & Grindlays Bank in 1969
 No particular definition of merchant banking
 No uniformity in service as variegated service provided
by merchant banks.
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Merchant Banking Services
 Project counseling services
 Corporate advisory services
 Corporate restructuring services
 Capital restructuring services
 Credit management services
 Issue management services
 Portfolio management services
 Private equity services
 Mezzanine financing services
 Structured products services

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Merchant Banking : Project
Counseling Services
 Specific projects, time bound, long term or short term,
capital intensive or labor intensive
 Extending/ arranging technical advice on various aspects
of project at various stages of planning, analysis,
selection, implementation and review
 Planning: generation, screening of ideas
 Analysis: market and demand analysis, technical and
financial
 Project selection: evaluating risk return profile
 Implementation: execution as per schedule, arranging
resources,
 Review: project performance evaluation
 Merchant bank may have in house expertise( technical
consultancy division) or arrange it

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Merchant Banking: Corporate
Advisory Services
 Highly specialised services offering real value addition
 Advisory services on issues like diversification of products,
product lines- strengthening or expanding, revival of sick
units, rehabilitation and monitoring thereof, takeovers etc.
 Advisory on location of plant, scale of operations, market
survey, demand forecasting, new product development,
pricing of products, product development, product
diversification, brand management, logistics, competitive
strategies, cost analysis and reduction raising of funds,
allocation of resources and legal formalities
 Effective dispute resolution in family managed businesses,
succession planning, tax advisory
 Finalisation of business deals, scouting for opportunities for
acquisition, mergers and overseas negotiations etc.

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Merchant Banking: Corporate
Restructuring Services
 In order to meet Global challenges, Corporates are attempting
to become lean and mean
 Downsizing, Debt Restructuring, Focus on Core Competencies
 Hiving off business units by sale, formation in new companies
and aligning of business activity for strategic consolidation
 Mergers, acquisitions, takeovers, spinoffs, leveraged buyouts,
buyback of shares, financial reengineering
 All above require continuous scouting for opportunities, arduous
back office work, scenario assessment, critical evaluation and
futuristic decision making
 Merchant Bankers strategise, assist and execute action plans to
complete such assignments mentioned above.
 Coordinate with domain specialists, support functions like
solicitors, bankers, accountants to implement time bound
solutions.
 Ensure compliance with various applicable laws and guidelines
of regulators

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Merchant Banking: Capital
Restructuring Services
 Significant managerial decision affecting shareholders
wealth optimisation.
 The structuring of finance for brown/ green field projects,
debottlenecking, rehabilitating sick units, acquisitions etc-
crucial for profitability of company
 Optimal debt-equity structure results in lower overall cost
of capital. Debt provides tax shield ( post tax effect) but
increases the leverage and the risk attached.
 Designing new capital structure , examination of
profitability, liquidity, control, nature of industry, timing,
taxes, legal framework and company characteristics.
 Merchant bankers use their expertise to advise companies

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Merchant Banking : Credit
Syndication Services
 Very crucial role in credit syndication: services range from
identifying and assessing the fund/ non fund based
financial requirements of the client, arranging the funding,
completion of formalities to facilitating withdrawals.
 Also arrange foreign currency loans from banks/ agencies
including hedging thereof.
 Credit syndication involves drawing a financial plan,
floating the proposal, selecting the banks/agencies to
approach, negotiating financial covenants with lenders,
completion of legal formalities and execution of
documents, security creation and establishment of
payment mechanism to facilitate withdrawals
commensurate with project development

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Merchant Banking : Issue
Management Services
 Actively involved in management of public issues
 Firms raise funds by way of equity, debt, preference
shares, debentures and bonds, PTCs etc. through private/
public placements
 Necessitates preparing activity and action plan, budget for
the issue, drafting application and securing approval from
SEBI, drafting of prospectus( for public issue) or letter of
offer, arranging and appointing intermediaries like
underwriters, brokers and bankers, pricing and timing of
issue, launch, conclusion of issue and post issue
completion of formalities including legal.
 Depending upon requirement, Merchant Bankers can
undertake complete responsibility

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Merchant Banking : Portfolio
Management Services
 Management of Investment Portfolios of Companies/
HNIs etc. by professionals having experitise and rich
domain knowledge on performance of economy/
industries/ companies
 Constant tracking of developments in Capital markets
for timing buying and selling decisions
 Handling of taxation issues on investments
 Building investment portfolios based on risk return
appetite of client, time horizon- short or long term,
objective to earn regular income or capital gain or
saving for big planned expenditure in future

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Merchant Banking : Private
Equity Services
 Investment made in a closely held unlisted company by a
fund instituted by HNIs and Institutional investors
 Such investment is by way of private equity done by PE
firms for 3-5years to nurture business ventures and fuel
their growth
 Quick appraisal, access to big ticket money for project
financing, expansion plans
 PEs later sell their equity in the market at the time of IPOs
or to other investors at a good price or arrange LBOs.
 PE used to finance new technologies, acquisitions or
growth plans. May specialise in certain industry like
renewable energy
 PE investment strategies include venture capital,
distressed investments, growth capital, LBOs or mezzanine
capital
 MB arrange such funding for a fee
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Merchant Banking : Mezzanine
Financing Services
 Basically debt capital, considered hybrid capital comprising
of debt and capital options
 The lender has the option to convert debt into equity if
company receiving loan fails to repay on due date
 Provided quickly, with a minimum of due diligence, even
on security of second or third or subservient charge, but
at high rates, sometimes against personal guarantee or
security of owners.
 Provided in emergent circumstances like cash crunch, for
acquiring an asset quickly before bank lending can be
arranged, as bridge financing
 Treated as quasi capital, enables leveraging
 MB arrange mezzanine financing for a fee.

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Merchant Banking : Structured
Product Services
 Special kind of financial instruments customised to
possess different combinations of risk-return profiles to
suit different objectives.
 Embedded features of options, swaps, forwards or futures
 Say Equity linked Note provides that a portion of
investment is placed in risk free or less risky bonds while
balance is put in equity. The first shall fetch interest and
principal on due date to pay off debt while the latter shall
bring capital gain for lender ( at the risk of price
fluctuation and possible loss)
 Products are structured after quantifying risk and pricing
( called financial engineering)
 MB design and market such products

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 SEBI RULES & Regulations for
Merchant Bankers
 Issued by SEBI in 1992, amended several times
 No corporate body, other than an NBFC, can act as MB unless
it receives certificate from SEBI. It shall pay fee for
registration/ renewal and take adequate steps for redressing
grievances of investors within a month of receipt of complaint
 Categories of MB: classified into four category
 Category I: Minimum net worth Rs. 50 mn, can carry on any activity
of issue management incl. preparation of prospectus and other
information, determining financial structure, tie up with financiers,
final allotment, refund. Can also act as adviser, consultant,
manager, underwriter or portfolio manager
 Category II: Min net worth Rs.5 mn, can act as adviser, consultant,
co-manager, underwriter or portfolio manager
 Category III: Min. net worth 2mn, can act as adviser, underwriter or
consultant
 Category IV : as adviser or consultant only to an issue
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SEBI RULES & Regulations for
Merchant Bankers
 Suspension :
 on violation of provisions
 failure to furnish information relating to activities or
furnishing wrong information
 failure to maintain capital adequacy requirement or payment
of fees
 Cancellation of registration:
 on deliberate price manipulation or price rigging or cornering
activities affecting securities market and investors’ interest
 Guilty of fraud or convicted of criminal offense
 Deterioration of financial position of MB

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 SEBI RULES & Regulations for
Merchant Bankers
 Code of conduct:
 No business other than that of securities market
 High standards of integrity and fairness in dealings
 Render high standards of service, exercise due diligence,
ensure proper care and exercise independent professional
judgment
 Make no exaggerated statements
 Not a party to price rigging or manipulation
 Should not divulge any confidential information relating to any
client to others, press or any other party
 Provide true and adequate information to investors
 Deal with investor complaints efficiently and adequately
 Adopt good corporate policies and corporate governance
practices
 All dealings to be prompt, cost effective and efficient
 Defaults & Penalties 17
Role of Merchant Bankers in
Issue Management
 Pre-issue obligations
 Post-issue obligations
 Due diligence refers to the process of verifying the truth of the
claims made by a person or an organization-conducted for
various purposes like making investments, lending, mergers and
acquisitions, selling or buying decisions etc. Issues may be
legal, financial, technical or marketing related.
 Focus of Due Diligence is on business plans, markting,
competition, investment opportunities, technology,
management team, manufacturing processes, infrastructure,
manpower resources, sources of raw materials, relations with
suppliers and other agencies, environmental issues, customer
relations, accounting system, audit system, organisational
structure and legal and regulatory issues.
 MB required to do due diligence about all issues of offerings.

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Thank You

Prof. Anil Kalra

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