Merchant Banking

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Merchant Banking
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Origin of Merchant Banking

• 13th Century merchant bankers were traders of
  commodities and acted as bankers to the kings of
  European states.
• They Financed the continental wars and coastal
  trades.
• They lent their names to lesser known traders by
  accepting bills through which they guaranteed
  that the holder of the bill would receive full
  payment.

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Managers to the issue or Merchant Bankers

• Advise on the capital structure, instrument of
  issue.
• Pricing
• Assessing and appraisal of project report.
• Appointment of bankers, underwriters, brokers,
  registrars, printers and advertisement agents.
• Holding brokers-Underwriters,

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• Press and investor conferences.
• Deciding the pattern of advertisement.
• Deciding the collection branches where
  application can be received or collected.
• Deciding on the dates of opening and closing of
  the subscription list.
• Obtain daily report of the applications and
  amounts collected at branches.

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• Obtaining subscription to the issue.
• Obtain consent of the Stock Exchange and get
  basis of allotment approved.
• Looking at the above roles of the MB a company
  should choose one after a lot of research into
  his integrity, expertise, competence.

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Factors to select a MB

• Ethics and integrity.
• Reputation.
• Trained committed manpower.
• Concern interest of clients.
• Liaison and networking.
• Relationship Contacts.
• Infrastructure.
• Past performance.

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Factors to select a client.

• Track record of the company.
• Track record of the promoters.
• Professional management.
• Financial strength of the promoters and the
  company.
• Economic viability of the project.

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Prime Objectives of MB

• Providing long term funds to the projects or
  companies.
• Project counseling- loan syndication, project
  appraisal and arrangement of Working capital.
• Deciding the capital structure.
• Portfolio Management
• Underwriting
• Corporate advisory issue mgmt.

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Emerging Areas.

• Private placements with NRIs and FIIs.
• Brought out deals.
• Market Making
• OTC
• NSE
• Forex
• Financial engineering- MAs, capital
  restructuring.

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SEBI (MB) Regulations, 1992

• Code of Conduct for MB
• Observe high standards of integrity and fairness
  in all his dealings.
• Render high standard of service, exercise due
  diligence, proper care, exercise independent
  judgment disclose conflict of interest while
  providing unbiased service.

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Code of conduct continued..

• Not make any statement or become privy to any
  act, practice or unfair competition, likely to
  harm the interest of other MB or is likely to
  place such other MB in a disadvantageous position
  in relation to the MB, while competing for or
  executing any assignment. (Harmful statement
  while solicitation execution)

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• Not make exaggerated statements, written or oral,
  to the client either about the qualification or
  the capability to render certain services or his
  achievements in regard to services rendered to
  other clients.
• Render best possible advice to the client having
  regard to the clients needs and the environment
  and his own professional skill
• Ensure that all professional dealings are
  effected in a prompt, efficient and cost
  effective manner.

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• A MB shall not divulge to other clients, press or
  any other party any confidential information
  about his client, which has come to his
  knowledge.
• Deal in securities of the client company without
  making disclosure to the board as required under
  the regulation and also to the Board of Directors
  of the client company.
• Provide investors with true and adequate
  information without making any misguiding or

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• exaggerated claims and are aware of attendant
  risks before any investment decisions are made.
• Ensure copies of prospectus, memorandum and
  related literature are made available to
  investors.
• Fair allotment of securities and refund of
  application money without delay.
• Investor complaints are adequately dealt with.

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• The MB shall not generally and particularly in
  respect of issue of any securities be party to
• Creation of false market
• Price rigging or manipulation
• Passing of price sensitive information or take
  any other action which is unethical or unfair to
  the investors.
• A MB shall abide by the provisions of the Act,
  rules and regulations which may be applicable and
  relevant to the activities carried on by the
  merchant banker.

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Non-Compliance and Defaults.

• Type 1 General Defaults.
• Type 2 Minor Defaults.
• Type 3 Major Defaults.
• Type 4 Serious Defaults.

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SEBI (MB) Regulations 1992

• Chapter I Preliminary
• Chapter II Registration of MB
• Chapter III General Obligations and
  Responsibilities.
• Chapter IV Procedure for Inspection.
• Chapter V Procedure for Action in case of
  Default.

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Schedule 1 Forms

• Form A Application for Grant of
  Certificate/Renewal of Certificate.
• Form B Certificate of Registration.
• Form C Due diligence certificate.

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• Schedule 2 Fees
• Schedule 3 Code for Merchant Bankers.

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Qualities of a good MB

• Leadership
• Aggressive action
• Co-operative and friendliness
• Contacts
• Attitude towards problem solving
• Inquisitiveness for new skills, information and
  knowledge