Merchant Banking

Merchant Banking refers to a specialized financial service that involves a

range of activities related to corporate finance and advisory services.
These banks, often known as investment banks or corporate finance
banks, serve as intermediaries between businesses and financial
markets.
Concept: Merchant banking is a distinct segment of banking and
financial services that focuses primarily on providing financial and
advisory services to corporations and businesses rather than individual
customers. It involves a wide array of activities related to capital raising,
investment, and financial management for corporate clients. Merchant
banks play a pivotal role in facilitating corporate growth, expansion, and
strategic decision-making.
Who is a Merchant Banker?

• A merchant banker can be defined as “An organization that acts as an

intermediary between the issuers and the ultimate purchasers of
securities in the primary security market.”
• A merchant banker is an institution that helps companies to raise
capital. It is an organization that underwrites corporate securities,
provides advisory services to its clients.
Functions
• Corporate Finance Advisory: Merchant banks offer advisory services to
companies on various financial matters, including capital structure, funding
options, and financial strategy. They assist in determining the most suitable
financial instruments for a company's specific needs.
• Capital Raising: Merchant banks help corporations raise capital through
various means, such as initial public offerings (IPOs), private placements,
debt issuance, and rights issues. They assist in structuring these
transactions and ensuring compliance with regulatory requirements.
• Mergers and Acquisitions (M&A): Merchant banks are instrumental in
facilitating mergers, acquisitions, and divestitures. They provide guidance
on valuation, negotiation, due diligence, and deal structuring.
• Asset Management: Some merchant banks manage investment portfolios
on behalf of institutional clients, offering services like portfolio
management, asset allocation, and investment research.
• Private Equity and Venture Capital: Merchant banks may engage in private
equity investments, where they invest in private companies and provide
strategic support. They also participate in venture capital funding for
startups and early-stage businesses.
• Loan Syndication: They assist companies in syndicating loans, especially in
cases where large amounts of capital are required. Merchant banks
collaborate with other financial institutions to raise funds collectively.
• Risk Management: They offer risk management solutions, including
derivatives and hedging strategies, to help companies mitigate financial
risks associated with currency fluctuations, interest rates, and commodity
prices.
• International Trade and Finance: Merchant banks often have a global
presence and provide services related to international trade finance,
foreign exchange, and cross-border transactions.
Present a simplified visual on the main functions of merchant banks:
• Capital Raising: IPOs, Debt Issuance, Private Placements
• Mergers and Acquisitions: Advisory services in buying/selling
companies.
• Loan Syndication: Pooling funds from multiple banks for large
projects.
• Private Equity & Venture Capital: Investment in growing companies.
• Risk Management: Hedging and derivatives to manage financial risks.
• International Trade Finance: Facilitating cross-border transactions.
• Case Study: Kotak Mahindra’s Merchant Banking Success
• Use a detailed case study to illustrate a real example:
• Kotak Mahindra Bank's Role in the Vodafone Idea Merger
• Kotak Mahindra played a key role in one of India’s largest telecom mergers.
The merchant bank guided both companies through the due diligence
process, helped them agree on valuation, and ensured compliance with
India’s competition laws. By acting as a financial advisor, Kotak Mahindra
ensured that both parties could come together to form one of the largest
telecom companies in the country.
• This case highlights the strategic, financial, and advisory roles of merchant
banks in large corporate deals.
Importance and need of Merchant Banking in India

• Merchant banking plays a vital role in the financial landscape of India, serving as a
crucial intermediary between corporations and financial markets. Its importance
and need in the Indian context can be understood through several key factors:
• 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.
 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.
History of Indian Merchant Banking
• The history of merchant banking in India can be traced back to the
late 19th and early 20th centuries when merchant banking activities
began to emerge. Here's a brief overview of the historical
development of merchant banking in India:
• In the early 20th century, specialized financial firms began to provide
services that laid the foundation for merchant banking in India.
• These firms acted as intermediaries, facilitating investments and
underwriting securities for businesses.
• The concept of merchant banking took root and evolved post-
independence, setting the stage for further growth.
Growth and Evolution
• The 1980s and 1990s marked significant growth in merchant banking in
India.
• The introduction of the SEBI Act in 1992 provided a regulatory framework
that legitimized and structured merchant banking activities.
• Merchant banks played a pivotal role in facilitating IPOs, leading to listings
on stock exchanges.
• In the 21st century, merchant banks diversified their services, becoming
involved in M&A advisory, private equity investments, and more.
• Today, merchant banking is an integral part of India's financial landscape.
• SEBI's regulatory oversight ensures transparency and compliance within
the sector.
• Merchant banking supports capital formation, plays a crucial role in
economic growth, and bridges the gap between savings and investments in
the country.
Merchant Bankers in India

• Merchant bankers in India are financial institutions or professionals who

provide specialized services to corporations, businesses, and government
entities. These services encompass a wide range of financial activities,
including capital raising, advisory, and financial planning. Merchant bankers
serve as intermediaries between their clients and the financial markets,
helping them achieve their financial objectives.
• Public Sector Merchant Bankers:-
SBI capital markets ltd
 Punjab National bank
 Bank of Maharashtra
 IFCI financial services ltd
State Bank of Bikaner and Jaipur
• Private Sector Merchant Bankers:-
 ICICI Securities Ltd
Axis Bank Ltd (Formerly UTI Bank Ltd.)
 Bajaj Capital Ltd
Tata Capital Markets Ltd
ICICI Bank Ltd
 Reliance Securities Limited
Kotak Mahindra Capital Company Ltd
Yes Bank Ltd.
• Foreign Players in Merchant Banking:-
Goldman Sachs (India) Securities Pvt. Ltd.
 Morgan Stanley India Company Pvt. Ltd
 Barclays Securities (India) Pvt. Ltd · Bank Of America, N.A
FEDEX Securities Ltd.
Types of merchant banking services
• Merchant banking encompasses a range of financial services and activities that are primarily
focused on providing capital, advisory, and support to businesses and entrepreneurs. There are
several types of merchant banking services:
 Corporate Finance: This involves assisting companies in raising capital for various purposes, such
as expansion, acquisitions, or working capital. Merchant banks may underwrite securities,
facilitate private placements, and advise on capital structuring.
 Advisory Services: Merchant banks offer strategic advice to clients on mergers and acquisitions
(M&A), divestitures, and other corporate transactions. They may also provide financial and
valuation analysis.
 Project Finance: Merchant banks arrange financing for large-scale infrastructure and industrial
projects. They help structure the funding, manage risks, and ensure the project's financial
viability.
 Asset Management: Some merchant banks manage investment funds and portfolios for clients,
investing in a variety of assets, such as stocks, bonds, real estate, and private equity.
 Private Equity: Merchant banks may invest in private companies, typically in exchange for an
ownership stake. They may also provide expertise and management support to help these
companies grow.
 Venture Capital: Similar to private equity, merchant banks may provide early-stage funding to
startups and high-growth companies. They often take an equity stake and provide guidance to
help these companies succeed.
Difference between Merchant Bank and Commercial Bank
 Commercial banks are catering to the needs of the common man whereas the
merchant banks cater to the needs of corporate firms.
 Any person can open a bank account in the commercial bank whereas it cannot
be done in the merchant bank.
Merchant bank deals with equities whereas the commercial bank deals with debt
related finance which includes the activities like credit proposals, loan sanctions
etc.
Merchant bank is related to the primary market whereas the commercial markets
are more into secondary markets.
 Merchant banking activities are capital restructuring, underwriting, portfolio
management etc. whereas the commercial banks play the role of financers.
The activities of merchant banks have a direct impact on the growth and liquidity
of money markets.
 Merchant Bank is management oriented whereas the commercial banks are
asset oriented
Government policy on merchant banking services
• The Government issued policy guidelines for merchant bankers to
ensure sufficient physical infrastructure, necessary expertise, good
financial standing, professional integrity and fairness in their
transactions. The merchant bankers have to be competent to serve
the investors also. On 1st March, 1993 new policy guidelines have
been issued by SEBI for the merchant bankers to ensure greater
transparency in their operations and to make them accountable so as
to protect the investor’s interest. The guidelines relate to pre-issue
obligations, underwriting, advertisements and post-issue obligations
of the merchant bankers.
SEBI Guidelines for Merchant Bankers
• The merchant banking activity in India is governed by SEBI (merchant
bankers) regulations, 1992. Registration with SEBI is mandatory to carry out
the business of merchant banking in India. An applicant should comply with
the following norms:
1. the applicant should be a corporate body.
the applicant should not carry on any business other than those connected
with the securities market.
the applicant should have necessary infrastructure like office space,
equipment, manpower, etc.
the applicant must have at least two employees with prior experience in
merchant banking.
 any associate company, group company, subsidiary or interconnected
company of the applicant should not have been a registered merchant
banker.
REGULATIONS, 1992. A merchant banker will require authorization by SEBI
to carry out the business. SEBI has classified the merchant bankers into
four categories based on the nature and range of the activities and the
responsibilities.
Category I Merchant Bankers: These merchant bankers can act as issue
manager, advisor, consultant, underwriter and portfolio manager.
Category II Merchant Bankers: Such merchant bankers can act as advisor,
consultant, underwriter and portfolio manager. They cannot act as issue
manager of their own but can act co-manager.
Category III Merchant Bankers: They are allowed to act as underwriter,
advisor and consultant only. They can neither undertake issue management
of their own nor they act as co-manager. They cannot undertake the
activities of portfolio management also.
Category IV Merchant Bankers: A category IV merchant banker can merely
act as consultant or advisor to an issue of capital
 From 9 December 1997, however, all other categories were abolished, and
merchant bankers can now only be registered under category- I by SEBI.
Capital adequacy norms The securities exchange board of India (SEBI) has
prescribed capital adequacy norms for merchant bankers to register under
the various categories. The minimum ‘net worth’ set by SEBI for category- I
of merchant bankers was initially fixed at the value of Rs. 1 crore and later
raised to the value of Rs. 5 crores through an amendment of the
regulations in the year 1995.
2. Every merchant banker should maintain copies of balance sheet, Profit
and loss account, statement of financial position
3. Half-yearly unaudited result should be submitted to SEBI
4. Merchant bankers are prohibited from buying securities based on the
unpublished price sensitive information of their clients
5. SEBI has been vested with the power to suspend or cancel the
authorization in case of violation of the guidelines
6. Every merchant banker shall appoint a ‘Compliance Officer’ to monitor
compliance of the Act
7. SEBI has the right to send inspecting authority to inspect books of accounts,
records etc. of merchant bankers
8. Inspections will be conducted by SEBI to ensure that provisions of the
regulations are properly complied
9. SEBI will give authorization for a merchant banker to operate for 3 years only.
Without SEBI’s authorization ,merchant bankers cannot operate
10. An initial authorization fee, an annual fee and renewal fee may be collected by
SEBI
11. 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
12. It is mandatory under SEBI rules that every issuing company must appoint one
or more SEBI registered merchant bankers as lead manager(s) for the management
of issue amount No of lead managers Up to 50 crores not more than Two 50 to 100
crores Three 100 to 200 crores four 200 to 400 crores five Above 400 Five or more
as may be agreed by the SEBI However, the limit to the maximum number of lead
managers to be appointed in a single issue was omitted through amendment in this
regulations on April 19, 2006
Code of Conduct
1. Adherence to Regulatory Framework
Merchant banks must comply with the regulations set by the Securities
and Exchange Board of India (SEBI) and other relevant authorities. This
includes:
• Ensuring compliance with SEBI regulations regarding disclosures, fair
dealing, and ethical standards in capital market transactions.
• Timely submission of reports to SEBI and other regulatory bodies.
2. Integrity and Fairness
Merchant bankers are expected to:
• Conduct business with integrity and fairness in all transactions.
• Ensure that they do not mislead clients or investors with false
information.
3.Transparency and Disclosure
Merchant banks must maintain transparency by:
• Disclosing all relevant information to their clients and investors
about the financial products and services being offered.
• Avoiding conflicts of interest by ensuring that potential risks are fully
communicated.
4. Protection of Client Interests
• Client Confidentiality: Maintain confidentiality of client information
and avoid disclosing sensitive information without authorization.
• Best Interests of Clients: Act in the best interests of clients, offering
suitable advice and financial products that align with their needs.
5. Avoiding Conflicts of Interest
Merchant banks should avoid engaging in activities that might lead to a
conflict of interest. They must:
• Ensure that their advisory and underwriting activities are free from
bias.
• Maintain a clear separation between advisory services and
proprietary trading or investing.
6. Professional Competence
• Merchant banks must ensure that their staff and representatives have
the necessary knowledge and competence to offer professional
financial services.
• Continuous training and skill development should be encouraged to
keep up with market trends and regulatory changes.
• 7. Ethical Marketing Practices
• Advertising and marketing material should be accurate, clear, and not
misleading.
• Merchant banks should avoid making exaggerated claims or false
promises about financial products or services.