Chapter 2 Merchant Banking Introduction — Meaning and Definitions ~ Origin of Merchant Banking — Merchang Banking in India ~ Scope of Merchant Banking in India — Reason for the growth of | MB in India — Objectives of Merchant Banking - Features of Merchant Bankers — Merchant Bank and Commercial Banks — Services of Merchant Banks— Role of Merchant Banker — Merchant Banking and SEB! — Classification of Merchant Banker by SEBI - Qualities required for a Merchant Bank — Merchant Bankers in the market making process — Code of conduct of Merchant Bankers - Progress of Merchant Banking in India — Problems of Merchant Bankers — AMBI to AIBI — Questions. INTRODUCTION: Merchant banking services strengthen the economic | development of a country as they act as source of funds and information for corporate entities. For a rapid growth of the economy, the role of Merchant banking services is indispensable. These financial institutions also act as advisory bodies to help .corporations rightly get involved in various financial activities. They manage and underwrite new issue, undertake syndication of credit, advice corporate clients on fund raising. | Merchant bankers provide assistance to the corporate houses for setting up industries. While bank assist industrial development by providing term loans and guarantees for setting up units and working capital, Merchant bankers play a different role by assisting industrial houses in the very formation of the unit and their horizontal and vertical expansion. These services do not come under the control of RBI, but are regulated by Securities and Exchange Board of India (SEBI): However, banks are forming subsidiaries to undertake MerchantMerchant Banking cog 31 banking activity and RBI may be interested in verifying the books of bank’s subsidiaries. /State Bank of India started the Merchant banking division in 1972./SBI was the first Indian Bank to set upa —— Fi = Merchant banking subsidiary, followed by Canara Bank. Today, a number of banks have set up subsidiaries or separate departments for this business. MEANING: [Merchant banking is a combination of banking and consultancy services.||It provides consultancy to its clients for financial, marketing, managerial and legal matters;/Consultancy means to provide advice, guidance and service for a fee. It helps a businessman to start a business. It helps to raise (collect) finance. It helps to expand and modernize the business. It helps in restructuring of a business. It helps to review sick business units. Italso helps companies to register, buy and sell shares at the stock exchange. DEFINITIONS: x é (Q) Cox. D. defines Merchant bank as “the financial Institutions providing specialist service which generally include the acceptance of bills of exchange, corporate finance, portfolio. management, ‘ underwriting and other banking services”. (2) The Notification of the Ministry of Finance defines a Merchant Banker as, “any person who is engaged in the business of issue. management either by making arrangements regarding selling, buying or subscribing to the securities as managers, consultants, advisors or rendering corporate advisory service.in relation to such issue management”. ORIGIN OF MERCHANT BANKING: As the British Empire expanded in the 18th and 19th Centuries, Merchant banks ‘proposed in London. For instance, merchant bankers funded Canada’s Hudson Bay Company. Since the 18th Century, the role of the Merchant banker have been considerablySs 7 Financial Services Monogement (BB!) (iy) i a2 Vipul’s broadened to include a composite of modern day skills. Such skills are inherently entrepreneurial, managerial, financial and transactional. In the 1920s, American Merchant banks began to become involved in investors relation and financing public companies. The Kennedy Fortune comes in part from Joseph Kennedy's involvement as a merchant banker to the pro-crash stock market. Over a period, they extended their activities tp domestic business of syndication of long-term and short-term finance, underwriting of new issues, acting as Registrars and share transfer agents, debentures trustees, portfolio managers, negotiating agents for mergers, takeovers, etc. _MERCHANT BANKING IN INDIA: } In India prior to the enactment of Indian Companies Act, 1956, managing agents acted as issue houses for securities, evaluated project reports, planned capital structure and to some extent — provided venture capital for new firms. India realized the need for | specialized merchant banking services after the rapid growth of | capital market. The first merchant bank services were started by foreign banks, namely the National Grindlays Bank in 1967 and to City Bank in 1970. In 1972, the Bank Commission in its report | recommended to start Merchant banking institutions by — commercial banks and financial institutions. 5 After that, many banks were offered Merchant banking services along with other traditional banking services. The State Bank of India was the first Indian Bank to set-up Merchant banking Division in 1972. After that, many banks have started Merchant banking Divisions. The Merchant banking gained prominence during 1983-84 due to new issue boom. In mid 1970s, there was a boom in the capital market with the introduction of “Foreign Exchange Regulation Act (FERA), 1973.” This created an awareness in the investing public about the ca pital market. This also encourages a few commercial banks and financial institutions to set up merchant banking divisions. In addition, private financial brokers also started private merchant banking organisation. Today, the Merchant Banking set up in the country is broadly divided into the following Sroups.‘Merchant Banking a Merchant Banking Divisions : ; Financial Private Foran eee indian Banks Institutions Merchant Bankers Subsidiary ‘A Division within Institutions the Bank \In the early stages, the role of merchant banking in India was largely confined to the management of public issues of equity capital. Today, the scope of merchant banking has gone much beyond just issue management. Banks’ ‘merchant banking divisions are now engaged in providing a wide spectrum of financial and related services to their customers. The names of some of them are:) (1) Public sector merchant bankers: ¢ SBI Capital Market Ltd. «Bank of Maharashtra ¢ Punjab National Bank (2) Private sector merchant bankers: * ICICI Securities Ltd ¢ Bajaj Capital Ltd © Tata Capital Ltd ¢ Reliance Securities Ltd * ~ Kotak Mahindra Capital Co. Ltd (3) Foreign Players in Merchant Banking: * Goldman Sachs (India) Securities Pvt. Ltd. * Bank of America * Deutsche Bank * Deutsche Equities India Pvt. Ltd.df 34 mw Vipul’s™ Financial Services Management (BB}) y sae SCOPE FOR MERCHANT BANKING IN INDIA: There is vast scope for merchant bankers to increase thej, | Operations in domestic as well as international markets. @)_ Growth of new issue market: Indian market is growing, Loy, i of new and green fried projects are happening. Merchany | bankers have lots of opportunities, space to contribute, Indian | as well as foreign markets are expected to continue in future, Q) Entry of Foreign investors: In 1992, foreign insti investors were allowed to invest in capital (both Primary and secondary) and also permitting Indian ,Sompanies to directly tap foreign capital through euro issues, (They need the service of merchant bankers to advise them for their investment in Indi (3) RBI policies: RBI prefers that commercial banks do not Provide merchant banking services, for that purpose, the bank has to set up separate subsidiai tit. This limits scope | of commercial banks si gives space merchant bankers, - (4) Changing Policy: Financial institutions have changed their lending policies from security orientation to project orientation. \Corporate enterprise would require the expert services of merchant bankers for project approval, financial management, etc. “ (5) Debt market: The development of debt market ‘will offer tremendous opportunities to merchant bankers, In India, the | © concept of debt market has to set to work through National Stock Exchange (NSE) and the Over The Counter (OTC). (6) Innovation in Financial Instruments: The Indian capital market have introduced many innovative products like non: convertible debentures, zero coupon ‘bonds, triple option ‘bonds, floating rate bonds, secured Premium notes etc. This | has further extended the role of mercha; 2 int bankers as market makers for these instruments. (7) Corporate culture: Corporate can 4, strategic restructuring in-house as wel], third party for such assessment, then th over to merchant bankers only, © project appraisal, If the corporate prefer | work will be handedMerchant Banking go 35 (8) Corporate dynamics: Increased activity in business like mergers, takeover, fund raising for government institution etc. gives more opportunities to merchant bankers. REASONS FOR THE GROWTH OF MERCHANT BANKING IN INDIA: The reason for growth of merchant bankers in India includes the following: 5 (1) Growing complexity in the nature of corporate entities. Q) Growing complexity in rules. and. ‘procedure ‘of the government. (3) Growing industrialization and increase of feciolngially - advanced industries: : (4) Need for encouragement of small and inedinim: industrialist who require specialist services. : Due to globalization and liberalisation the markets expands to a greater level. (6) Exploring the Possibility, of joint ventures abroad and foreign market. (7) Increasing technology i in stock market arid emergence of new. products. (8) Need to develop backward area and’ states which require different criteria. 6) OBJECTIVES OF MERCHANT BANKING: (1) To assist in the capital formation in the economy. (2) To create secondary market for bills and facilitate discounting or re-discounting of bills. ; (3) To assist in foreign exchange dealings within the ambit of relevant laws and regulations. (4) To promote the venture capital technology funds and provide services to them. P (5) To assist in project formulation and development.“Financial Services Management (BB) ( ce Vipul’s (6) To assist in modemization and diversification of busines, unit. (7) To assist in mobilizing resources by the business enterprises, FEATURES OF MERCHANT BANKING: () Merchant Banker as a manager, consultant, advisor in the process of selling, buying, subscribing to securities ang rendering corporate advisory services in relation to such issue management. (2) Merchant banking is the financial intermediation that matches the entities that need capital and those that have capital for investment. i (3) Merchant bankers engage in the business of issue management. (4) Merchant banker’s services include the arrangement regarding selling, buying or subscribing to securities. (5) Merchant banker mainly engaging in money market activities and lending, underwriting and financial advice and investment services. (6) Merchant banking is skill based activities and involves serving every financial need of every client. (7) The Merchant banks have emphasis on fee and commission income. (8) They provide special and sophisticated services on a national and international level. : (9) The organisation structure of merchant bankers in India have the special nature of formation, that is they are established on any one of the following form: : (i) Institutional base (ii) Banker base (iii) Private base, and (iv) Broker base.Merchant Banking 37 MERCHANT BANKS AND COMMERCIAL BANKS: Both commercial banking and merchant banking have their roots that go beyond hundreds of years ‘or more. Merchant banks were actually the original banks, which were invented by Italian grain merchants in the middle ages. Commercial bank typically refers to a bank, which accepts deposits, and provides loans and advances to individuals and small.businesses. It also purchases bonds from governments and corporate entities. Merchant banking, however, often focuses on investing a depositors’ asset in a finance portfolio and managing these investments. Commercial banks, however, focus mainly on accepting deposits and lending money for an interest with the objective of earning profit. . Difference between Merchant Banks and Comunercial Banks: Commercial Banks Merchant Banks (1) Clients: ; Commercial banks are catering The merchant banks cater to the to the needs of the common man. _| needs of corporate firms. (2) Saving Account: Any person can open a bank Tt cannot be done in the account in the commercial bank. _| merchant bank. 3 (3) Assistance: ; Tita Commercial banks provide| Merchant banks _ provide financial assistance in the form of acsistance_in raising cepital in the the [term loan and working capital. _| form of equity, preference shar syndicated loan working capital instrument (4) Accepting deposi : Commercial banks as their] Merchant banks do. not accept | _ primary nature of business accepts | deposits. | deposits’ both demand and time} ~~ deposits, (5) Fund: Commercial bank deals with| — It deals with equities, debt related finance which includes the activities like credit proposals, loan sanctions, etc.38 ™ Financial Services Management (BB}) ty Vipul’s’ (©) Type of Market: Commercial banks are more| Merchant bank is related to thy related to secondary markets, primary market (7) Nature of business: Commercial banks are asset] The, merchant oriented and their decisions are | management oriented. banks are __ Commercial banks are merely] Merchant bankers’ activity financiers. include _project__counselling, amalgamation, mergers, takeover, portfolio _—s—S management, underwriting, etc. | (9) Risk: | The commercial © banks! The merchant banks are willing generally avoid risks. totake the risks. - Tall (10) Understanding of business: The commercial bank can| A merchant bank © cannot], undertake merchant _ banking | undertake banking business. business. SERVICES OF, MERCHANT BANKS/FUNCTIONS. OF MERCHANT BANKS: eat 5 The services of merchant bankers are discussed as follows and - the diagram given on the next page shows the list of services of merchant banks: (1) Corporate counselling: Merchant banking _ institutions provide guidance to the client on organisational goals, choice of product and market survey, forecasting a product, cost analysis, investment decisions, ‘pricing methods, capital management and expenditure control, marketing strategy etc. The--scope of corporate counselling is limited. to giving suggestions and options to the client and help taking actions to solve their problems.39 ‘Merchant Banking 0) Corporate Counseling (i) Merger and ‘Acquisition Project ‘Counséling MERCHANT BANKING SERVICES i) Portfolio Management of jolnt stock ‘company (2) Project counselling: Project counselling comprises preparation of project reports, deciding upon the pattern of financing to meet out the cost of the project and appraising the project report with the financial institutions and banks and the validity of the projects: It also includes filling up of application forms with significant information for obtaining funds from financial institutions and obtaining government approval and various procedures for implementation of the projects etc. Management of Debt and Equity offering: This is the major function. of the merchant banker. Merchant banker assists the companies in raising funds from the market. The main areas of work in this regard are Instrument Designing, pricing, the issue, Registration .of the Offer Document, Underwriting 340 (4) (3) (6) Pak } Vipults™ Financ! Serces Management (BB) ( Support, Marketing of the Issue, Allotment and Refund ang Listing on Stock Exchanges. | Loan syndication: Loan syndication isan ee Provid by merchant bankers to get mainly term loans for projects, y | helps corporate clients to raise syndicated loans from banks and other financial institutions. It helps the clients to get | for the project. For this, they provide various services toward, |, syndication of loans. The services may be either loan Sought | for long term fixed capital or of working capital funds. 4 Issue management: Issue management means Management |’ of issues involves marketing of corporate securities. Merchant banks act as an intermediary to transfer capital from those who own it to those who need it. Merchant banker organizes. a’ meeting with company representatives and advertising agents to finalise 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. The merchant bankers provide issue management services for the following issues: (a) Public issue (b) Right issue (c)_ Debenture issue (d) Advisors to Non-Resident Issues (e) Private Placement Underwriting of Capital Issue: Underwriting is a guarantee given by the underwriter that in the event of under- subscription the amount underwritten, would be subscribed by him. The companies for raising capital in the stock markets can engage a merchant banker to implement and underwrite the process. The merchant banker performs all the’ work required regarding the compliance with concerned authorities and are also responsible for marketing the new stock. They ensure the minimum subscription. In the event of shortage of public subscription, they undertake such shortage and relieve the firm.‘Merchant Banking ri a 4 (7) Management of Fixed deposits of Joint Stock Companies: The service of merchant bankers regarding the management of fixed deposits include, computation of amount that a company can raise by way of deposits from the public, advising the company on terms and conditions for acceptance of fixed deposits, arranging for issue of advertisement in newspaper, maintaining of records/registers etc. Portfolio management: Portfolio refers to investment in different kinds of securities such as shares, debentures issued by different companies. Portfolio management refers to maintaining proper combination of securities in a manner that they give maximum return to the investors. Merchant bankers help their investors in deciding such combination of the securities. They conduct regular market and economic surveys. i Bought out deals: A bought out deal is a deal in which the company sells its shares to an agent, or a merchant banker. This merchant banker then off loads. or sells the shares at an appropriate time. Bought out deals is beneficial to firms and promoters. The main benefits are (i) easy and quick sale of securities (ii) Bought-out deals offer flexibility for promoters to set a realistic price. a " + (10) Venture capital: Funding an emerging high risk, hitech project based purely on research and development efforts is “terms as venture capital financing. It is a source of financing for hi-tech industries which use new technology to produce new products. The services of merchant bankers includes the provision of long term start-up funds for high risk ventures promoted by unknown entrepreneurs which suffer from capital deficiencies but have a high profit potential. (11) Merger and Acquisition: The. merchant banker provides service on negotiating acquisitions and mergers by offering expert valuation regarding the quantum and the nature of considerations and other related matters. . (12) Miscellaneous services: Merchant banks also provides: following services. They are: (i) Leasing (ii) counselling to sick industrial unit (iii) stock broking for both institutional andwe Vipul’s retail investors (iv) Distribution of financial product (v) Asset management (vi) investment research (vii) commoditie, broking (viii) advisory services for joint ventures (x) off shorg finance (x) non-resident investment etc. ROLE OF MERCHANT BANKER: In the early stages, the role of merchant banking was mainly: confined to the management of public issues of equity capital, Recently, merchant bankers are engaged for rendering a wide spectrum of financial and other related services to clients, Nowadays, modern merchant bankers role now starts right from the promotion of the company. Merchant bankers offers various services to the promoter as a corporate advisor. Merchant banker advises . regarding identification of the | Project, preparing feasibility report, selection of location of the Project, size of organisation, investment decisions, obtaining government approval, etc. All merchant bankers do not specialise in all these services. Different merchant bankers specialise in different services. Before selecting a merchant banker, one should decide as to which of their services are required. Also, selection of the merchant banker depends on whether one needs to satisfy a short term or long-term objectives, or both. In India, following are the services mainly rendered by merchant bankers. They are as follows: (1) Managing of public issue of securities. (2) Underwriting of public issue. (3) Portfolio investment management services. (4) Project counselling. (5) Advisory services relating to mergers and takeovers. (6) Loan syndication. (7) Investment services for NRIs. (8) Offshore finance. (9) Providing margin money for working capital. (10) Restructuring services and etc. oN) fe " 1 Financial Serces Management (BB) (4,Merchant Banking @ B MERCHANT BANKING AND SEBI: The Securities and Exchange Board of India (SEBI) is the statutory body that supervises India’s Capital Market. It is mandatory for a merchant banker to register with the SEBI. Without holding a certificate of registration granted by the Securities and Exchange Board of India, no person can act as a merchant banker in India. As per the SEBI notification during the year 2009, number of registered merchant bankers were 134. It includes public sector, private sector and foreign merchant bankers. CLASSIFICATION OF MERCHANT BANKERS BY SEBI: As per SEBI regulations, merchant bankers are classified into four categories. As per the SEBI Regulation, 1992, a body corporate other than a Non-Banking Financial Company (NBFC) can undertake activities that are relating to merchant banker. An applicant seeking registration as Merchant Banker shall comply with the requirements such as the Capital Adequacy Requirements, Registration fees, and Criteria for fit and proper person. The applicant by a person shall be made for any one of the following categories of the merchant banker. Classification] Business Activities Capital Adequacy Requirement CategoryI [It can-carry any activity | The merchant bankers of issue management _| should have a net worth which include of not less than %5 Crore. preparation of ~ | (Net worth means the prospectus, other sum of paid up capital information related, - |and free reserve of the issue, determining applicant at the time of financial structure, tie | submission of applicant) up of financier, final allotment and refund.44 Viput’s™ Financial Senices Management (Bal) (y) To act as adviser, consultant, merger, underwriter and Portfolio manager. Category It |it can act as advisor, It should have not less consultant, co-manager, | than 750 lakh. underwriter and Portfolio manager. (Not Permitted to issue management related. activities) Category It [Itcanactasan ~ Itshould have minimum underwriter, advisor _| net worth of 220 lakh. and consultant to an issue. (Not permitted to Provide portfolio management services and issue management) Category IV_ | It can act only as an Minimum Capital advisor or consultant to | Adequacy requirement ~ an issue. is not insisted to this category. ~ : SEBI Guidelines for Merchant Bankers: Merchant banking in India is governed by SEBI (Merchant Bankers) Regulations, 1992. These were amended from time to time. It is mandatory for a merchant bankers to register with the SEBI. (1) Categories of Registration: The Merchant bankers should register according to the categories. They are: Category I: To carry on the activity of issue management and to act as adviser, consultant, manager, underwriter, portfolio manager. Category I: To act as adviser consultant, co-manager, underwriter, portfolio manager.Merchant Banking a3 re 45 Category III: To act as underwriter, adviser or consultant to an issue. Category IV: To act as adviser or consultant to an issue. (2) Capital Adequacy Requirements: The SEBI has prescribed the following capital adequacy requirements for Se categories of merchant bankers: Category I - 25 crore Category II - %50 Lakh Category III - 220 Lakh Category IV - NIL. Procedure for getting Registration: An application should be moved to the SEBI in Form A of the SEBI (Merchant Bankers) - Regulations, 1992. The SEBI shall consider the application and on being satisfied issue a certificate of registration in Form B of the Act. Within 15 days of the receipt of the intimation from the Board, the merchant banker shall pay a sum of 210 lakh as registration fees. Further, to keep registration in force, he shall pay renewal fee of 35 Lakh every three years from the fourth year from the date of initial registration. (4) Only.a body corporate other than a non-banking financial company shall be eee to Bet registration as merchant _ banker. (5) The applicant should not carry on any business other than those connected with the securities market. (6) All applicants for merchant banker should have. qualification in Finance, Law or Business management and applicant should have infrastructure like space, equipment, manpower, etc. (7) The applicants for merchant bankers should fulfil capital adequacy (net worth) criteria as specified by SEBI from time. to time. Merchant bankers. should act only on authentic official information and not enter into any transactions on the basis of rumours or on unpublished information available to them in the course of their professional management. GB (8)wad 46 re viput’s™ Financial Services Management (BA) (y, (9) SEBI has prescribed a code of conduct to the merchayy bankers, The banker must perform his duties with highes i standards of integrity and fairness in all his dealings. | (10) Inspection will be conducted by SEBI to ensure that} Provisions of the regulations are properly complied with ang | to investigate the compliance from customers. It is obligato, | on the part of merchant banker to furnish all the details | Tequired by investigating team. (11) An initial authorization fee, an annual fee and renewal fog may be collected by SEBI. | (12) The merchant bankers should maintain proper books of | accounts and have to submit half yearly/annual financial | statement to SEBI within the time specified. | (13) The merchant bankers can associate only with others who are registered under SEBI. (14) All issues must be managed at least by one authorized banker, functioning as the sole manager or the lead manager. (15) Every merchant banker should appoint a compliance officer. (16) SEBI can suspend/cancel registration of defaulter merchant bankers. QUALITIES REQUIRED FOR MERCHANT BANKERS: Merchant bankers are individual experts who organise and manage the merchant banks. The operations of merchant banks are, therefore influenced by ‘the personality trait of these individuals. For the success of merchant bank's operations, the qualities which merchant bankers should have are discussed below: (1) Ability to analyse: Ability to analyse various aspects such as technical, financial and economic aspects concerning the. formation of an industrial project. (2) Knowledge: Through understanding of technical issue related to business, understanding of legal and statutory requirement, knowledge of trends’ in stock exchange:Merchant Banking 47 psychology of investing public, technological environment, financial expertise are key things a merchant bank must know. (3) Capital market familiarity: Merchant banker should be familiarity with primary market, secondary market, stock market, their movement and procedure. He should track important happening in the market on.an ongoing basis. (4) Innovative approach: Innovative approach in developing capital market instruments to satisfy the ever changing needs of investing public. : i (5) Integrity: Merchant banker has valuable and confidential information of its customers. Merchant bank has to maintain. high professional standards in the present scenario. (6) Attitude towards problem solving: The most. important personality trait of a merchant banker is his attitude towards problem solving. Positive approach to understand the viewpoints of others, their difficulties and their adverse circumstances is possible only when a person is skilled in human relations particularly the inter-personal _and_intra- personal behaviour. Effective communication and proper feedback are the pre-requisite for creating a positive attitude towards problem solving. : MERCHANT BANKERS IN. THE MARKET MAKING PROCESS: eo The Securities and Exchange Board of India (SEBI) has stated that merchant bankers must be involved more closely in the market making process as share brokers do not have the requisite expertise to evaluate the fundamentals of the scrips before taking over the role of market makers. Further, share brokers generally being partnership firms; do not have the financial clout which is necessary for market making activity. The SEBI has suggested that any member of the Stock Exchange, along with one Merchant banker registered with SEBI could act as a market maker. The SEBI has felt that to ensure liquidity of scrips, it was necessary to facilitate greater movement, which could only be48 Financial Services Management (Bg)) ty Vipul’s achieved through the institution of market makers. Mar... makers would also create a market for the scrips by offering tw, | Way quotes to the investors. A minimum of ten scrips have bee, | Proposed by SEBI for the market makers. | i i CODE OF CONDUCT OF MERCHANT BANKERS: 5 [The Regulation 13_provides that each merchant banke, | registered with SEBI should follow the prescribed code of Condue, 28 given under the Schedule III of the SEBI (Merchant Banker, Regulation. \The code of conduct emphasises the importance of rity, honesty and ethical behaviour expected from merchan} bankers. There were thiriy two points were framed by SEBI under code of conduct, few of them are as follows. (1) A merchant banker shall make full efforts to_protect. the interest of investors. . os (2) It has to maintain high standards of integrity, dignity anq fairness in the conduct of its business. (3) Tt shall fulfil its obligations in a prompt, ethical and Professional manner. (4) It shall ensure that adequate disclosures are made to the investors in a timely manner in accordance with the | applicable regulations and guideline. It shall endeavour to ensure that the investors are provided with true and adequate information without making any misleading or any misrepresentation. 6) (6) It has to make sure those copies of the prospectus, offer document, letter of offer or any other related literature is | made available to the investors at the time of issue or the offer. (7) It shall not discriminate amongst its clients, save and except | on ethical and commercial consideration. (8) It shall avoid conflict of interest and make adequate | disclosure of its interest.‘Merchant Banking 49 (9) It shall not make untrue statement or suppress only material feet in any documents, reports or information furnished to the SEBI. (10) It shall not disclose to other clients, press or any other party any confidential information about his client, which has come to his knowledge. (11) It shall also ensure that all professional dealings are carried on ina prompt, efficient and cost effective manner. (12) It shall develop its own internal code of conduct for governing its internal operations and. laying down its standards of appropriate conduct for its employees and officers in carrying out their duties. (13) It shall. be responsible for the Acts or omission of its employees and agents in the respect. of the conduct of its business. (14) it shall ensure that good corporate policies and corporate governance are in place. aycatly (15) A merchant banker shall not be a party to or instrument for: (i) Creation of false market; ; (ii) Price rigging/ manipulation; or (iii) Passing of unpublished price sensitive information etc. PROGRESS OF MERCHANT BANKING IN INDIA: Till 18th Century, moneylenders, money changers, village merchants and saucers performed the functions of banks and merchant banks. Jagat Sheth (Bengal), Habib & Sons which is now Habib Bank, founded in 1941 now in Pakistan, were the organised - merchant bankers in the history of India. ; In 1969, merchant activity in India was originated professionally with the merchant banking division set up by the Grindlays Bank, the largest foreign bank in the country. Following Grindlays Bank, Citibank set up its Merchant Banking division in 1970. Consequent to the recommendations of Banking Commission in 1972, that Indian banks should offer merchant50 Vipul’s™ Financial Services Management (BB)) y bank services as part of the multiple servicas theyicould provid their clients. The State Bank of India (SBI) started the Merchany Banking division in 1972. ; The commercial banks that followed SBI were Central Bank of. India, Bank of India, Syndicate Bank in 1977, Bank of Baroda Standard Chartered Bank and Mercantile Bank in 1978 and United | Bank of India, United Commercial Bank, Punjab National B Canara Bank and Indian Overseas Bank in late 1970s and early | 1980s. ICICT started merchant banking activities in 1973 followeq_ by IFCI (1986) and IDBI (1991). Thus, by the end of the 1989 there were 33 merchant bankers belonging to three Major. segments viz., commercial banks, Indian financial institutions ang Private firms. Merchant banking functions of these institutions. was related only to management of new capital issues. The number of merchant banks by the end of 1992-93 were 115 and it was increased to 501 by the end of 1994-1995. All merchant | bankers registered with SEBI under four different categories include 50 commercial banks, 6 all India financial institutions ~ ICICI, IFCI, IDBI, IRBI, Tourism Finance Corporation of India, Infrastructure Leasing and Financial Services Ltd and private | merchant bankers. In addition to Indian merchant bankers, a large | number of international merchant bankers like Goldman Sachs, Morgan Stanley etc. are providing merchant banking service in | India. In 1997, 1163 merchant banks were registered. But,-in the | year of 2011, only 199 merchant bankers were there in India. There were 195 merchant banker at the end of financial year 2017-18 and 203 merchant banker were there as on 31st Dec. 2018. PROBLEMS OF MERCHANT BANKERS: ts (1) In India, SEBI guidelines have authorized merchant bankers to undertake issue related activities only with an exception of portfolio management. These guidelines have made the merchant bankers to restrict their activities, (2) RBI does not permit merchant banking firms to do the service of underwriting, hire purchase, leasing, money lending and portfolio management, so the same promoters have to set UPMerchant Banking g@ SI different companies for different purpose. This will increase management cost and expertise pooling. (3) SEBI guidelines stipulate a minimum net worth of 21: authorization of merchant bankers. Small but prof and specialized merchant bankers who do not have a net worth of.1 crore may have to close down their business. (4)_Non-co-operation of the issuing companies. in timely allotment of securities: and refund_of application. money is another problem of merchant bankers. (5) Professional qualification focused on merchant banking isnot pee zi available. e Still there is a scope for further improvement of the activities of merchant bankers. ASSOCIATION OF INVESTMENT BANKERS OF INDIA (AMBI to AIBI): [association of Merchant Bankers in India is a professional non- rofit_company set up to represent the. merchant banking “dusty in 1998 MBI was incorporated and approved by SEBI to set up professional standards, for providing efficient services and to establish standard practices in merchant banking and financial services. In 2010, the name of AMBI was changed as AIBI_ (Association_of Investment Bankers of India) to include all _ activities carried out by the Investment Bankers in India. AIBI's -Drimary objective isto ensure that its members ender services 0 all constituents within an agreed framework of ethical principles “and practices. AIBI also works towards promoting the interests of ‘the industry and of our members. End. of May 2020, the association have 53 members. we Objective Questions with Answers || (1) Fill in the blanks: (a) The minimum net worth for the first category of merchant banker is (b) Merchant bankers engage in the business of management.