MERCHANT BANKING

Merchant Bank is Traced to ITALY

FRANCE during 17th & 18th Century

MONEY CHANGER- Change of different Currencies

EXCHANGERS- Remitters & Merchant bankers.

In UK Merchant banking came into Late 18th & 19th Century

Commercial Bank provide multiple services including MB

Grind lays bank received the license from reserve bank in 1967

Citibank Setup its merchant banking division in 1970 & SBI 1972.

History
Origin of Merchant Banking
The origin of merchant banking is to be traced to Italy in late medieval times and France during the seventeenth and eighteenth centuries. The Italian merchant bankers introduced into England not only the bill of exchange but also all the institutions and techniques connected with an organized money market during seventeenth and eighteenth centuries. In France a merchant banker (le merchant banquet) was not merely a trader but an entrepreneur par excellence. He invested his accumulated profits in all forms of promising activities. He added banking business to his merchant activities and became a merchant banker.

Money changer and exchanger

In the late medieval to early modern times distinction existed in banking system between money changer and exchanger. Money changers concentrated on the manual change of different currencies operated locally and later accepted deposits for security reasons. In course of time, money changers evolved into public or deposit banks. International exchangers engaged in bill- broking, raising foreign exchange and provision of long term capital for public borrowers. The exchangers were remitters and merchant bankers. During this period merchant banker was a dealer in bills of exchange who operated with correspondent abroad and speculated on the rate of exchange. Initially, merchant banks were not banks at all and a distinction was drawn between banks, merchant banks and other financial institutions. Among all these institutions, it was only banks that accepted deposits from public. Merchant banks in the United Kingdom In the United Kingdom, merchant's banks came into operation in the late eighteenth century and early nineteenth century. Industrial revolution made England into a powerful trading nation. Rich merchant houses that made their fortunes in colonial trade

Diversified into banking

Their principal activity started with the acceptance of commercial bills pertaining to domestic as well as international trade. The acceptance of the trade bills and discounting gave rise to acceptances houses, discount houses and issue houses. Merchant banker was primarily a merchant rather than a banker but he was entrusted with funds by his customers. The term merchant bank is used to denote banks that are not merchants. Sometimes for merchants who are not bankers and sometimes for business houses that are neither merchants nor banks. These confusions emerge because of a wide range of activities carried out by modern merchants. The merchants provide various services, like: Finance foreign trade, Issue capital, Manage individual funds, Undertake foreign security business, foreign loan business. Since the end of the Second World War, commercial banks in Western Europe have been offering multiple services including merchant banking services to their individuals and corporate clients. British banks set up divisions or subsidiaries to offer their customers merchant banking services.

Merchant Banking in India

Merchant banking activity was formally initiated into the Indian capital Markets when Grind lays bank received the license from reserve bank in 1967. Grind lays started with management of capital issues, recognized the needs of emerging class of entrepreneurs for diverse financial services ranging from production planning and system design to market research. Even it provides management consulting services to meet the requirements of small and medium sector rather than large sector. Citibank Setup its merchant banking division in 1970. The various tasks performed by this divisions namely assisting new entrepreneur, evaluating new projects, raising funds through borrowing and issuing equity. Indian banks Started banking Services as a part of multiple services they offer to their clients from 1972. State bank of India started the merchant banking division in 1972. In the Initial years the SBI's objective was to render corporate advice And Assistance to small and medium entrepreneurs.

Merchant banking activities is OF course organized and undertaken in several forms. Commercial banks and foreign development finance institutions have organized them through formation divisions, nationalized banks have formed subsidiaries companies and share brokers and consultancies constituted themselves into public limited companies or registered themselves as private limited companies. Some merchant banking outfits have entered into collaboration with merchant bankers abroad with several branches.

Definition
The Notification of the Ministry of Finance defines merchant banker as 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 In the words of Skully A Merchant Bank could be best defined as a financial institution conducting money market activities and lending, underwriting and financial advice, and investment services whose organization is characterized by a high proportion of professional staff able to able to approach problems in an innovative manner and to make and implement decisions rapidly.

Nature of merchant banking Merchant banking is skill based activities and involves serving every financial need of every client. It requires focused skill-base to provide for the requirements of the client. SEBI has made the quality of man-power as one of the criteria for registration as merchant banker.

The services of merchant bank

No
1

Particulars
Corporate Counseling:

Summary
Covers the entire field of merchant banking, Ltd to giving suggestions. Preparing project report for govt. approval , financial assistance. Assistance rendered to get term loan for project,help client make appraisal, designing capitalstructure etc. Marketing corporate securities, intermediary in transfer of capital from one who owns to needy . Guarantee given by the underwriter, make raising of external resource easy. Drafting, completion of formalities, appoint Registrar etc Investment in different kind of securities Middlemen in setting negotiation Help in areas involving foreign currency 10Non- Resident Investment :Provide help in better and smooth trade to NonResident Investments foreign businesses booming here. Indian economy provides an amicable environment for these firms to set up, flourish and expand here.

2 3

Project Counseling: Loan Syndication:

Issue Management:

Underwriting

6 7 8 9

Managers to Issue: Portfolio Management : Mergers and takeovers : Off Shore Finance :

Structure
Category Minimum Net Worth A. 5 Crore 1. 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 2. to act as adviser, consultant, manager, underwriter, portfolio Manager. II 50 Lakhs 1. that is, to act as adviser, consultant, co-manager, Underwriter, portfolio manager. III 20 Lakhs 1. that is to act as underwriter, adviser, consultant to an issue. IV Nil 1. that is to act only as adviser or consultant to an issue.

Characteristics of Merchant Banking: High proportion of decision makers as a percentage of total staff. Quick decision process. High density of information. Intense contact with the environment. Loose organizational structure. Concentration of short and medium term engagements. Emphasis on fee and commission income. Innovative instead of repetitive operations. Sophisticated services on a national and international level. Low rate of profit distribution. High liquidity ratio. Qualities of a Merchant Banker: Ability to analyze Abundant knowledge Ability to built up relationship Innovative approach Integrity

Functions of merchant bankers: Management of Debt and Equity Offerings : Placement and Distribution: Corporate Advisory Services: Project Advisory Services: Loan Syndication: Providing Venture Capital Financing:

Scope in India:
1)Growth of New Issues Market Indian market largest emerging market Domestic and foreign investors setting up their business here. Many public and private issues coming up 2)Entry of Foreign Institutional Investment Indian capital market is globalised Foreign Institutional Investments are permitted to invest in India. They need Merchant Banks to advise them for their invite in India. Increasing number of Joint Ventures also require expert services of Merchant Banks. 3)Changing Policy of Foreign Investments Liberalisation of policies Foreign Investments would require expert services of Merchant Banks for project appraisal, financial management, financial restructuring etc. 4)Development of Debt Market Good portion of capital can be raised through debt instruments. 5) Innovations in Financial Instruments New financial instruments have come up. Merchant Banks are market makers for these instruments. 6) Corporate Restructuring Liberalisation and globalisation Competition in corporate sector becoming intense. Companies reviewing their strategies, structure and functioning etc. leading to corporate restructuring. 7) Disinvestment It means reduction of some kind of asset of a firm for achieving either financial or ethical objectives. Motive of disinvestment is to obtain funds.

Problems of Merchant Banking: 1)Restriction of merchant banking activities: SEBI guidelines have authorized merchant bankers to undertake issue related activities and made them restrict their activities or think of separating these activities from present one and float new subsidiary and enlarge the scope of its activities. 2) Minimum net worth of Rs.1 crore: SEBI guidelines stipulate that a minimum net worth of Rs.1 crore for authorization of merchant bankers. 3) Non co-operation of issuing companies: Non co-operation of the issuing companies in timely allotment of securities and refund of application money is another problem faced by merchant bankers. 4) Merchant Bankers Commission: Maximum :- 0.5% Project appraisal fees Lead Manager :- 0.5% up to Rs.25 crores - 0.2% more in excess of Rs.25 crores Underwriting fees Brokerage commission :- 1.5% Other expenses :-Advertising -Printing -Registrars expenses -Stamp duty In spite of problems popping up, merchant banking in India has vast scope to develop because of lot of domestic as well as foreign businesses booming here. Indian economy provides an amicable environment for these firms to set up, flourish and expand here.

Difference Between Commercial Banking & Merchant Banking: COMMERCIAL BANKING Deals with Debt & Debt related finance. Asset oriented. Generally avoid risks. MERCHANT BANKING Deals with Equity & Equity related finance. Management oriented. Willing to accept risks. Difference Between Investment Banking & Merchant Banking: INVESTMENT BANKING Both fee-based and fund-based. Commit their own funds. MERCHANT BANKING Purely fee-based. Impossible to stay aloof from international trends.

GUIDELINES FOR MERCHANT BANKERS :

SEBIs authorization is a must to act as merchant bankers. Authorization criteria include Professional qualification in finance, law or business management Infrastructure like office space ,equipment and man power Capital adequacy Past track of record, experience, general reputation and fairness in all transactions Every merchant banker should maintain copies of balance sheet, Profit and loss account, statement of financial position Half-yearly unaudited result should be submitted to SEBI Merchant bankers are prohibited from buying securities based on the unpublished price sensitive information of their clients SEBI has been vested with the power to suspend or cancel the authorization in case of violation of the guidelines Every merchant banker shall appoint a Compliance Officer to monitor compliance of the Act SEBI has the right to send inspecting authority to inspect books of accounts, records etc of merchant bankers Inspections will be conducted by SEBI to ensure that provisions of the regulations are properly complied An initial authorization fee, an annual fee and renewal fee may be collected by SEBI A lead manager holding a certificate under category I shall accept a minimum underwriting obligation of 5% of size of issue or Rs.25 lakhs whichever is less

CODE OF CONDUCT :
Should make all efforts to protect the interest of investors Should maintain high standards of integrity, dignity and fairness in conduct of business Should fulfill all obligations in a professional and ethical manner Should not discriminate among the clients Should ensure that prospectus, letter of offer etc.. is available to investors at the time of issue Should render best possible advice to its clients Any penal action taken by SEBI should be informed to its clients Should inform the board about any legal proceedings initiated against it Should abide by the rules of Securities and Exchange Board of India Regulations,2003 Shall develop its own internal code of conduct for governing its internal operations Should ensure that any person it employs should have the capacity to be a merchant banker It is responsible for the act of its employees and agents Should not create false market

Public issues (eligibility norms) : 1. For unlisted companiesShould have a pre-issue net worth of a minimum amount of Rs. 1 crore in 3 out of the preceding 5 years. Compulsorily meet the minimum net worth level during the two immediately preceding years. Should have a track record of distributable profits as given in section 205 of the companies act 1956 for at least 3 years In the preceding 5 year period The issue size should not exceed an amount equal to five times its preissue net worth.

2. For listed companiesMust have a track record of distributable profits in compliance with section 205 of the companies act 1956 for at least 3 years In the preceding 5 year period It must have a pre-issue net worth of not less than Rs. 1 crore in 3 out of the 5 preceding years, with the minimum net worth to be met during the immediately preceding 2 years. Registration charges : Registration charges According to SEBI the charges payable by the merchant banker are as under: Category 1- a sum of Rs. 2.5 lakh to be paid annually for the first two year commencing from the date of initial registration and thereafter a sum of Rs. 1 lakh to keep the registration in force. Category 2- A sum of Rs. 1.5 lakh to be paid annually for the first two year commencing from the initial registration and thereafter a sum of Rs. 50000 to keep the registration in force. Registration charges : Registration charges Category -3A sum of Rs. 1 lakh to be paid annually for the first two year commencing from the date of initial registration and there after a sum of 25000 to keep the registration in force. Category 4- A sum of Rs. 5000 to be paid annually for the first two year commencing from the date of initial registration and there after a sum of Rs. 1000 to keep the registration in force