1. UNIT- 3
Merchant Banking
Banking services + Consultancy services
(Collect finance) (financial, marketing, managerial
& legal matters)
Haresh R
Asst. Professor
Dept of Commerce
Christ University
2. Introduction
• Basically a service banking.
• Provides non-fund based services (Fee Based)
• Arranges funds rather than providing them
• Intermediary in transferring capital from place of
surplus to deficit
• An institution which understands
Requirements of FIs, Banks, Stock xchange
entrepreneurs and money market
3. Merchant Banking: Origin
• Merchant Banking came into existence in 12th
century in Italy (Riccadi of Luca, Medici, Fugger)
• 17th and 18th century bills of exchange and money
market instruments introduced to English
businessmen by Italian Merchants.
• Merchant banking in the modern era started from
London; Merchants started to finance the foreign
trade through acceptance of bill.
4. • Till 1932 there was no distinction between
merchant banks and commercial banks. The
Glass-Steagall Act 1933 distinguished
(MB/IB from CB)
• 1987 commercial banks were permitted to
create subsidiaries for the purpose of
undertaking MB/IB activities in USA
• Merchant banks were known as “accepting &
issuing houses” in the UK and “Investment
banks” in USA.(Only difference in
nomenclature but not in functional aspects)
5. • Merchant Banking officially came to India
through ANZ Grindlays Bank in 1967 after
obtaining license from RBI (Management of
capital issue, financial services, market research,
management consultancy services)
• 1970 - Citibank merchant banking division.
6. • 1972 – SBI merchant banking division
• ICICI the first Pvt institution started MB service
in 1974.
• Many other banks came after this like Canara
Bank, UCO bank etc., started their operation.
7. • Forms of Merchant Banks
– Commercial banks & foreign development finance
institutions, nationalised banks through subsidiary
companies, sharebrokers and consultants in the
form of public or private limited companies,
collaborations with foreign merchant bankers.
8. Meaning of Merchant Banking
• a financial institution that provides capital to
companies in the form of share ownership instead
of loans.
• provides advisory on corporate matters to the
firms they lend to.
• In other words…
“Merchant bank refers to an organization that
underwrites securities and advises such clients on
issues like corporate mergers, involving in the
ownership of commercial ventures”.
9. Definition
According to SEBI (Merchant Bankers) Rules
1992, “A merchant banker has been defined as
any person who is engaged in the business of issue
management either by making arrangements
regarding selling, buying or subscribing to
securities or acting as manager, consultant
advisor or rendering corporate advisory services in
relation to such issue management”.
10. Merchant Bank Vs Commercial Bank
• CBs deal in debt and debt related finance. MBs
deal in equity and equity related finance.
• CBs avoid risk - credit analysis of loan proposals -
value of security offered – asset oriented. MBs
are management oriented and are willing to
accept risks.
• CBs are merely financiers. MBs undertake project
counseling, corporate counseling in areas of
capital restructuring, mergers, takeovers etc.,
11. Functions/Services of Merchant Banking
1. Corporate Counseling
2. Project Counseling
3. Pre investment studies
4. Capital Restructuring
5. Credit Syndication & Project Finance
6. Issue Management & underwriting
7. Portfolio Management
8. Working Capital Finance
12. 9. Acceptance of credit & bill discounting
10. Merger, Amalgamation & Takeover
11. Venture capital
12. Lease Financing
13. Foreign Currency Financing
14. Fixed Deposits Broking
15. Mutual Funds
13. Corporate Counseling
• A set of activities undertaken to ensure the efficient running
of a corporate enterprise is known as corporate counseling.
• A merchant banker guides the client on aspects of
– organizational goals
– vocational factors
– organization size
– choice of product
– demand forecasting
– cost analysis
– allocation of resources
– investment decisions
– capital and expenditure management
– marketing strategy
– pricing methods etc.
14. • Diagnosing sick units, assessing revival prospects
for rehabilitation, suggesting suitable strategy for
improving their production technology and
financial structure.
• Suggestions and opinions to the client and help
taking actions to solve their problems.
• It is provided to a corporate unit with a view to
ensure better performance, maintain steady
growth and create better image among investors.
15. Project Counseling
• Project counseling is the feasibility study of the
project with reference to various aspects such as
financial, economical, commercial technical etc.
• It includes
– preparing project reports
– finance for cost of project
– appraising projects from the angle of technical,
commercial and financial viability.
– getting approval of project from bank/Govt and other
agencies
– planning for public issue.
16. Pre-Investment Studies
• It is a detailed feasibility study to evaluate
alternative avenues of capital investment in
terms of growth and profit prospects.
– Analyzing environment and regulatory factors
– Identification of raw material sources
– Estimation of demand
– Estimation of financial requirements
17. Capital Restructuring Services
• Capital restructuring aims to reduce the cost
of capital and maximize the shareholders
wealth.
– Determination of optimum capital structure
conforming to legal requirements.
– Getting consent of controller of Capital issues for
capitalization of reserves by way of issuing bonus
shares.
– Here the Capital Structure is worked out i.e., the
capital required, raising of the capital, debt-equity
ratio, issue of shares and debentures, working
capital, fixed capital requirements, etc.,
18. Credit Syndication
• Credit Syndication refers to obtaining of loans
from single development finance institution or
a syndicate or consortium.
• credit procurement and project financing,
aimed at raising Indian and foreign currency
loans from banks and financial institutions.
19. Steps followed by MB - Clients - FIs
• MB first makes an appraisal of the project to satisfy that it is
viable
• He ensures that the project adheres to the guidelines for
financing industrial projects.
• It helps in designing capital structure, determining the
promoter‘s contribution and arriving at a figure of approximate
amount of term loan to be raised.
• After verifications of the project, the Merchant Banker
arranges for a preliminary meeting with financial institution.
• If the financial institution agrees to consider the proposal, the
application is filled and submitted along with other documents.
20. Issue Management and Underwriting
• Issue management and underwriting is concerned
with the activities of management of the public issues
of corporate securities, viz. equity shares, preference
shares, and debentures of bonds to procure money
from the capital market.
• Underwriting is a guarantee given by the underwriter
that in the event of under subscription, the amount
would be provided by him to the extent of under
subscription.
• All public issues are to be underwritten fully.
21. Portfolio Management
• Refers to investments in different kinds of securities such as
shares, debentures, bonds issued by different companies and
securities issued by the Govt.
• Merchant bankers advise about mix of investments a company
should follow to ensure maximum return with minimum risk.
– Providing advice on selection of investments.
– Carrying out a critical evaluation of investment portfolio.
– Collecting and remitting interest and dividend on
investment.
– Undertaking investment in securities.
– Safe custody of securities in India and overseas.
22. Working Capital Finance
• Working Capital finance is the fund required to meet
the day-today expenses of an enterprise.
• The related activities are:
– Assessment of working capital requirements.
– Facilitating sanction of credit facilities speedy
disbursements.
23. Merger and Acquisition
• The merchant banker arranges for negotiating
acquisitions and mergers by offering expert
valuation regarding the quantum and the nature
of considerations, and other related matters.
– Conducting SWOT analysis in order to help formulate
guidelines and directions for future growth.
– Conducting studies for locating overseas markets,
foreign collaborations and prospective joint venture
associates.
– Obtaining approvals from shareholders and other
stakeholders
– Monitoring the implementation of merger and
amalgamation schemes.
24. Lease Financing
• Leasing is one of the fund based financial
services of merchant banker. Leasing means
‘letting out assets on lease’ for use by the
lessee for a particular period of time.
Merchant banker provides the following
services:
– Providing advice on the viability of leasing
– Providing advice on the choice of a favorable
rental structure.
25. Foreign Currency Financing
• Foreign currency finance is the fund provided for foreign
trade transactions in the form of export-import trade
finance, euro currency loans.
– Assisting the study of turnkey project and construction of
contract projects.
– Liaison with RBI, EXIM, ECGC and other institutions.
– Providing assistance in opening and operating banks accounts
abroad.
– Assisting in obtaining export credit facilities and letter or credit.
– Providing guidance on forward cover for exchange risk.
– Arranging foreign currency guarantees.
– Arranging various types of foreign currency loans such as
Eurocurrency Loans, Syndication of Euro loans, Bank guarantees
etc.
26. Scope for Merchant Banks in India
The present capital market scenario provides a vast
scope for merchant banking in india. Below mentioned
point justify it clearly.
(i) Growth of new issue market – Due to unprecedented
growth in new issue market, MB’s has to play crucial role
in managing issue of shares & securities.
(ii) Entry of foreign investors – has further improved
their scope in India due to opening up Indian Capital
market in 1992 for foreign investors. Increasing number
of joint ventures abroad by Indian companies and further
increased this scope.
27. (iii) Changing policies of Financial Institutions –
From security orientation to project orientation has
given a further boost to MB’s as their services are
required for project preparation, appraisal and
getting the projects approved for getting finances.
(iv) Innovations in financial instrument – New
instruments are coming in capital market and MB’s
are market makers for those new instruments.
28. (v) Corporate restructuring – Due to increased
liberalization, globalisation and privatization,
competition in corporate sector is becoming
intense leading to corporate restructuring in the
form of merger, acquisition, take over,
necessitating the services of MB‟s.
(vi) Dis-investment – Policy of disinvestment in
public sector is opened up good scope for MB’s
in capital market.
29. The following are some of the reasons why
specialist merchant bank have a crucial role to
play in India.
• Growing complexity in rules and procedures of
the government.
• Growing industrialization and increase of
technologically advanced industries.
• Need for encouragement of small and
medium industrialists, who require specialist
services.
30. • Need to develop backward areas and states
which require different criteria.
• Exploring the possibility of joint ventures
abroad and foreign market.
• Promoting the role of new issue market in
mobilizing saving from.
31. Problems of merchant banks
1. Restrictions in scope of merchant banking
activities with focus only on issue related activities
and certain exceptions for portfolio management.
2. SEBI guidelines stipulate a minimum net worth
of Rs.1 crore for authorization of merchant bankers.
Difficulty for adhering such net worth norms by
small firms.
3. Non cooperation of the issuing companies in
timely allotment of securities and refund
application money is another problem of merchant
bankers.
32. 4. Unhealthy competition among large number of
merchant banks compels them to reduce their
profit margin, commission etc.
5. There is no exact regulatory framework for
regulating and controlling the working of merchant
banks in India.
6. Fraudulent and fake issue of share capital by the
companies are also posing problems for merchant
banks who act as lead manager or issue manager of
such issues.
