Merchant banking in india jatin garg 11107027

Merchant banking in india

1. [TYPE THE COMPANY NAME]
MERCHANT BANKING IN
INDIA









By:
JATIN GARG

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TABLE OF CONTENTS
TABLE OF CONTENTS ........................................................................................................... 2
MERCHANT BANKING .......................................................................................................... 4
INTRODUCTION: ................................................................................................................ 4
EVOLUTION OF MERCHANT BANKING: ...................................................................... 4
MERCHANT BANKING IN INDIA ........................................................................................ 5
A LOOK INTO HISTORIC DEVELOPMENT .................................................................... 5
CHARACTERSTICS OF MERCHANT BANKING: .......................................................... 5
ROLE OF MERCHANT BANKING IN INDIA: ................................................................. 6
Issue Management ............................................................................................................. 6
Banker to the issue ............................................................................................................. 6
Debenture Trustee .............................................................................................................. 7
Underwriting ...................................................................................................................... 7
Corporate Counselling ....................................................................................................... 7
Project Counselling ............................................................................................................ 7
Types of Merchant bankers .................................................................................................... 8
 Category I .................................................................................................................... 8
 Category II................................................................................................................... 8
 Category III ................................................................................................................. 8
 Category IV ................................................................................................................. 8
Leading merchant bankers in India ........................................................................................ 8
Public sector: ...................................................................................................................... 8
Private sector:..................................................................................................................... 8
Foreign merchant bankers: ................................................................................................. 8
Present scenario of Indian Merchant Banking ....................................................................... 8
The challenges faced by merchant bankers in India .............................................................. 9
Case Study ............................................................................................................................... 10
BOB capital Markets Limited .............................................................................................. 10
Strengths .......................................................................................................................... 10
SERVICES:- .................................................................................................................... 10
Investment Banking ..................................................................................................... 10
Retail Broking .............................................................................................................. 10

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Institutional Broking .................................................................................................... 10
Mutual Fund Distribution ............................................................................................ 10
Kotak Securities ................................................................................................................... 11
Large Presence: ................................................................................................................ 11
Services:-.......................................................................................................................... 11
IDBI capital .......................................................................................................................... 12
SERVICES:...................................................................................................................... 12
REFRENCES: .......................................................................................................................... 13

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MERCHANT BANKING

The Progress of any economy mainly depends on the efficient financial system of the
country. Indian economy is no exception of this. This importance of the financial sector
reforms affirms an effective means for solving the problems of economic, financial and social
in India and merchant banking plays a key role in that.
INTRODUCTION :
There is not a standard definition regarding the term merchant banking. Some
countries often call it ‘Investment banking’ or ‘accepting and issuing houses’ and they serve
different purposes regarding to the need of financial system of the country. Usually, the
purpose of merchant banking is to facilitate the issuers of securities (companies) to raise
capital from the financial market by selling the securities. It offers a package of services
related to the capital raising activity. This is the reason, why sometimes, it is often identified
with capital issue activities of companies.
EVOLUTION 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. Initially, merchant banking consisted
of merchants who assisted in financing the transactions of other merchants in addition to their
own trade. In the seventeenth century, a merchant banker was a dealer in bills of exchange
who operated with correspondents abroad and speculated on the rate of exchange.
In the United Kingdom, merchant banks came on the scene in the late eighteenth
century and early nineteenth century. Merchant banks initially included acceptance houses,
discount houses and issue houses. Therefore often they were referred as 'accepting and
issuing houses'. Modern merchant banks have a wide range of activities such as finance
foreign trade, issue capital, managing individual funds, and undertaking foreign security
business and foreign loan business. The oldest merchant bank in London was Baring
Brothers.
English and European merchant banks played a prominent role in the United States
until indigenous merchant bankers emerged in the 1880’s. In U.S.A., these were known as
investment bankers. Soon, they replaced brokers and promoters who earlier played a
prominent role in the issue of securities and started launching and organising industrial units
and mergers and helping transformation of privately held companies into publicly owned
companies. The role of today’s Investment banks is to make the primary markets in USA,
arrange mergers and acquisitions, undertake global custody, proprietary trading and market
making, niche business, fund management and advisory services to governments and firms.
The five largest investment banks were Bear Stearns, Lehman Brothers, Merrill Lynch
Goldman Sachs and Morgan Stanley.

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MERCHANT BANKING IN INDIA
In India, the merchant banking sector has grown at a faster pace in the last two
decades. But, over the years, the number of players in the merchant banking industry came
down and currently we find only a few large firms surviving in the industry.
According to SEBI, “a merchant banker is one who is engaged in the business
of issue management either by making arrangements regarding selling, buying or subscribing
to the securities as manager, advisor or rendering corporate advisory services in relation to
such issue management”.
A LOOK INTO HISTORIC DEVELOPMENT
The first merchant banking activity in India started in 1969 by the Grindlays Bank by
opening a merchant banking division. Initially they were issue mangers looking after the
issue of shares and raising capital for the company. But subsequently they expanded their
activities such as working capital management; syndication of project finance, global loans,
mergers, capital restructuring, etc., initially the merchant banker in India was in the form of
management of public issue and providing financial consultancy for foreign banks.
In 1973, SBI started the merchant banking and it was followed by ICICI. SBI capital
market was set up in August 1986 as a full-fledged merchant banker. Between 1974 and
1985, the merchant banker has promoted lot of companies. However they were brought under
the control of SEBI in 1992.After bringing them the ambit of SEBI regulations there has been
a disciplined growth of the industry.
CHARACTERSTICS OF MERCHANT BANKING:
A Merchant Bank should following characteristics:
 High proportion of decision makers as a percentage of total staff
 Quick decision process
 High density of information
 High proportion of professionals to total staff
 Flexible organisational structure
 a short chain of command
 Innovative instead of repetitive operations
 High level of financial sophistication.

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ROLE OF MERCHANT BANKING IN INDIA:

Issue Management

The management of issues for raising funds through various types of instruments by
companies is known as issue management. The different functions of merchant bankers
towards the capital issues management are:
 Designing Capital Structure: The term capital structure refers to the proportionate
claims of debt and equity in the capital of a company. These help in making decisions
regarding the use of different types of capital funds in the overall long term
capitalization of a firm by analyzing various affecting factors such as Business
Activity, Stock Market, Taxation, Regulations, and Credit Policy.
 Capital Market Instruments: Financial instruments that are used for raising capital
resources in the capital market are known as Capital Market Instruments. E.g.
debentures, shares. These help to determine better source of raising money.
 Issue Pricing: The free pricing of equity shares by an infrastructure company is
subject to the compliance with disclosure norms as specified by the SEBI from time to
time.
 Book Building: Book building is a process of generating, capturing, and recording
investor demand for shares during an initial public offering (IPO), or other securities
during their issuance process, in order to support efficient price discovery
 Preparation of Prospectus: Prospectus is defined a document through which public are
solicited to subscribe to the share capital of a corporate entity. Its purpose is inviting
the public for the subscription/purchase of any securities of a company.
 Selection of Bankers: Merchant bankers assist in selecting the appropriate bankers
based on the proposals or projects. Commercial bankers are merely financiers and
their activities are appropriately arrayed around credit proposals, credit appraisal and
loan sanctions. But merchant banking include services like project counseling ,
corporate counseling in areas of capital restructuring amalgamations, mergers,
takeover etc.
 Advertising Consultants: Merchant bankers arrange a meeting with company
representatives and advertising agents to finalize arrangements relating to date of
opening and closing of issue, registration, of prospectus, launching publicity
campaign and fixing date of board meeting to approve and sign prospectus and pass
the necessary resolutions.

Banker to the issue
Bankers to the issue, as the name suggests, carries out all the activities of ensuring
that the funds are collected and transferred to the Escrow accounts. The Lead Merchant
Banker shall ensure that Bankers to the Issue are appointed in all the mandatory collection
centres as specified in DIP (Disclosure and Investor Protection) Guidelines. The Lead
Merchant also ensures follow-up with bankers to the issue to get quick estimates of collection
and advising the issuer about closure of the issue, based on the correct figures.

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Debenture Trustee
A debenture trustee is a person or entity that serves as the holder of debenture
stock for the benefit of another party. When a company is looking to raise capital, one
method of accomplishing this is by issuing stock as a form of debt with the obligation to
repay the debt at a specific interest rate. The trustee serves as a liaison (way of
communication) between the company that issued the debentures and the debenture holders
that are collecting interest payments.
The debenture trustee serves are the official representative for the debenture investors
and is responsible for liquidating the collateral of the trust in the event that the company
defaults on its debentures.
Underwriting
Underwriting refers to the process by which investment banks raise investment capital
from investors on behalf of corporations and governments that are issuing securities
(both equity and debt capital). In banking, underwriting is the practice by which investment
bankers represent corporate and government entities in the initial public offering of their
securities. The investment bankers cover the risk of selling the securities to the public.
The securities underwriting process requires at least two participants, including a
client, such as a corporation or a government entity, and a merchant bank. When an issuer,
such as the company or government, needs to raise money, it turns to the capital markets to
either sell equity or debt. In order to execute the sale, one or more merchant banks are hired
for the securities underwriting process. The merchant bank is responsible
for underwriting those securities, a process that includes pricing, buying, and reselling
those shares back to the public.
Corporate Counselling
Corporate counseling is the beginning of the merchant banking services. Every
industrial unit either new or existing needs it. The scope of corporate counseling is very vast.
It covers a wide range of merchant banking activities and includes the services such as
project counseling, project management, loan syndication, working capital management,
capital re-structuring, public issue management, fixed deposit, lease financing, etc.
Project Counselling
Project counseling has originated from corporate counseling. It relates to project
finance and includes preparation of project reports, cost of the project and also arranging the
financing pattern. The projects are appraised on the basis of the location, marketing and
technical and financial viability of the project.
Beside these, they also play major role in Mergers and Acquisitions, Buy Back
Assignments, Issuing & Paying Agent (IPA) for Commercial Paper Issues, Monitoring
Agency Assignments.

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Types of Merchant bankers
The categories of Merchant banker are:
 Category I – To carry on the activity of issue management and to act as adviser,
consultant, manager, underwriter, portfolio manager.
 Category II – To act as adviser, consultant, co-manager, underwriter, portfolio
manager.
 Category III – To act as underwriter, adviser or consultant to an issue
 Category IV – To act only as adviser or consultant to an issue
Leading merchant bankers in India

In India, there are public sector, private sector as well as foreign players in the
merchant banking industry. Some of the key players are listed below.
Public sector: SBI Capital Markets, Punjab National bank, IFCI Financial Services
Private sector: ICICI Securities, Axis Bank, Bajaj Capital, Tata Capital Markets, Yes
Bank, Kotak Mahindra Capital Company, Reliance Securities
Foreign merchant bankers: Goldman Sachs (India) Securities, Morgan Stanley India,
Barclays Securities (India), Bank of America, Citigroup Global Markets India.
Present scenario of Indian Merchant Banking

India’s strength in Information Technology sector is well known, but it is India’s fast
growing manufacturing sector, driven by approximately three million SME`s (on small and
medium enterprises) in sectors ranging from auto components to industrial goods, that is
rapidly India a leading global manufacturing hub. Debt Financing is not the answer for
SME`s. There seems to an across the board consensus that Indian SME`s have not been able
to fully tap their potential and keep pace with India’s growth because of their inability to
access greater sources of financing. For vast majority of Indian SME`s, the high domestic
interest rate regime (prime rate of 12.75% to 13.25%) continues to be a substantial hindrance.
Furthermore, the ability to raise debt financing outside India (typically referred to as External
Commercial Borrowings (ECBs) is strictly regulated by RBI. No IPO boom for Indian SMEs
in Indian stock markets. The Indian stock markets including the BSE & NSE have essentially
ignored robust Indian SMEs. The avg. size of Indian IPO rose to approximately $100 million
in 2008-09. Meanwhile smaller Indian companies seeking to raise funds of less than that
amount have found it increasingly difficult to raise funds through Indian Stock Markets
listings.

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According to SEBI only 104 companies raised capital in the range of $2.5 million to
$125 million in March 2007 fiscal year. No companies have raised money in the $1.25
million to $2.5 million range since April 2007. Finally, only 52 companies have been able to
raise funds in the range of $2.5 million to $125 million in March 2008 fiscal year. There are
few smaller Indian IPOs because Indian merchant bankers prefer to work on bigger IPOs that
earn them bigger, as the work required for a small IPO compared to a large IPO is relatively
the same. Also the regional stock exchanges, where the majority of SMEs would list
themselves if possible, face stiff competition from India’s two major stock exchanges BSE &
NSE.












The challenges faced by merchant bankers in India

 SEBI guideline has restricted their operations to Issue Management and Portfolio
Management to some extent. So, the scope of work is limited.
 In efficiency of the clients are often blamed on to the merchant banks, so they are into
trouble without any fault of their own.
 The net worth requirement is very high in categories I and II specially, so many
professionally experienced person/ organizations cannot come into the picture.
 Poor New issues market in India is drying up the business of the merchant bankers.

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Case Study

In this section, detail is given upon various services that are provided by Merchant
Banks in India.
BOB capital Markets Limited
BOB Capital Markets Ltd. (BOBCAPS) is a wholly owned subsidiary of Bank of
Baroda. BOBCAPS is one of the Investment
Banking Companies in India and is a SEBI
registered Category I Investment Banker. We are
shortly commencing Broking/E-broking Business. BOBCAPS offers the entire spectrum of
financial services that includes Initial Public Offerings, Private Placement of Debt, Corporate
Restructuring, Business Valuation, Mergers & Acquisitions, Project Appraisal and Loan
Syndication. BOBCAPS also undertakes advisory services on Securitization and Structuring
of Debts.
Strengths
 Patronage of Bank of Baroda
 Excellent association with Banks and Financial Institutions
 Good relationship with fellow market intermediaries
 Large client base consisting of blue chip and midcap companies
 Good rapport with regulatory authorities
SERVICES:-
Investment Banking
IPO / Rights Issue / FPO, Mergers & Acquisition, Private Placement of Debt / Equity,
Private Equity Advisory, Corporate Advisory Services, Project Appraisal / TEV Studies,
Debt Syndication, Business Valuation
Retail Broking
Online Trading, Call and Trade, Applying IPOs Online, Applying MFs Online
Institutional Broking
Institutional Equity Broking Services, Equity Research, F & O Dealing and Sales
Mutual Fund Distribution
BOB Capital Markets Ltd. (BOBCAPS), a wholly owned subsidiary of Bank of
Baroda is into Mutual Fund Distribution and Advisory Services. As a distributor we are

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empanelled with 28 SEBI Registered Mutual Funds in India including SBI, UTI, Reliance,
HDFC, Fidelity, and Franklin Templeton.
Kotak Securities

Kotak Securities Ltd. 100 % subsidiary of Kotak Mahindra Bank is one of the oldest
and largest broking firms in the Industry. It is a subsidiary of Kotak Mahindra bank which
was reconstruction from a private company to a public limited company effective from June
13, 2003. Act as a lead manager to several (IPO’s) & help in Client in accessing the public &
private equity market.
It is also a depository participant with National Securities Depository Limited
(NSDL) and Central Depository Services Limited (CDSL).
Kotak Securities Limited has Rs. 2300 crore of Assets under Management (AUM) as
of 31st March, 2010.
Large Presence: At present Kotak in 331 cities with 843 offices all over the country.
Services:-
 stock broking through the branch and Internet,
 Investments in IPO,
 Mutual funds
 Portfolio management service,
 Currency Derivatives,
 Insurance.

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IDBI capital
IDBI Capital Market Services Ltd., (IDBI Capital) is
a wholly owned subsidiary of IDBI Bank Ltd and is a
leading Investment Banking & Securities Company. IDBI Capital offers a full suite of
products and services to Corporate, Institutional and Individual clients.
SERVICES:
 Investment Banking
 Capital Market Products
 Private Equity
 Corporate Advisory Services
 Mergers & Acquisitions
 Project Appraisals & Debt Syndication
 Stock Broking - Institutional & Retail
 Distribution of Financial Products
 Debt Placement and Underwriting
 Fund Management (Managing Clients' Assets-Pension/PF Fund Managers)
 Research Group
IDBI Capital is highly regarded for safety and trust and enjoys a credit rating of “AAA”
by CARE for its medium-term borrowings and P1+ by ICRA for its short-term borrowings.

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REFRENCES:
 Merchant Banking by H.R. Machiraju
 https://www.pnbindia.in/En/pdf/MerchantBankingoverview.pdf
 http://www.slideshare.net/
 http://en.wikipedia.org
 https://www.scribd.com/
 http://unionbankofindia.co.in
 http://www.bobcapitalmarkets.com
 http://www.kotaksecurities.com
 Do Public Sector Merchant Banks Require Pills to Survive? By Asst. Prof. Jainish
Bhagat and Dr. Keyurkumar M. Nayak.
 http://www.investinganswers.com/