MERCHANT BANKING OBJECTIVES

MERCHANT BANKING OBJECTIVES : Objective of this lesson is to get an idea regarding merchant banking STRUCTURE : 1.1.1 Introduction 1.1.2 Definition 1.1.3 Origin 1.1.4 Merchant Banking in India 1.1.5 Merchant Banks and Commercial Banks 1.1.6 Services of Merchant Banks 1.1.7 Functions of Merchant Bankers 1.1.8 Merchant Banking Objectives 1.1.9 Scope for the Merchant Banking in India 1.10 Review Exercises 1.1 INTRODUCTION The term merchant banking is used differently in different countries and so there is no precise definition for it. In London, merchant banker refers to those who are members of British Merchant Banking and Securities House Association who carry on consultation, leasing, portfolio services, assets management, euro credit, loan syndication etc. In America, merchant banking is concerned with mobilising savings of people and directing the funds to business enterprise. 1.2 DEFINITION There is no universal definition for merchant banking. It assumes diverse functions in different countries. So merchant banking may be defined as, 'an institution which covers a wide range of activities such as management of customer services, portfolio management, credit syndication, acceptance credit, counseling, insurance etc. Further a merchant banker is, any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to the 1

securities as manager, consultant, adviser or rendering corporate advisory service in relation to such issue management 1.3 ORIGIN Merchant banking originated through the entering of London merchants in financing foreign trade through acceptance of bill. Later, the merchants assisted the Government of under developed countries in raising long-term funds through flotation of bonds in London money market. Over a period, they extended their activities to domestic business of syndication of long-term and short-term finance, underwriting of new issues, acting as registrars and share transfer agents, debenture trustees, portfolio managers, negotiating agents for mergers, take over etc. The post war period witnessed the rapid growth of merchant banking through the innovative instrument like Euro dollar and the growth of various financial centres like Singapore, Hong Kong, Baharain, Kuwait, Dubai etc. 1.4 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. Few share broking firms also functioned as merchant Bankers. The need for specialized merchant banking service was felt in India with the rapid growth of the number and size of the issues made in the primary market. The merchant banking services were started by foreign banks, namely the National Grindlays Bank in 1967 and the City Bank in 1970. The Banking Commission in its report in 1972 recommended the setting up of merchant banking institutions by commercial banks and financial institutions. This marked the beginning of specialized merchant banking in India. To begin with, merchant banking services were offered along with other traditional banking services. In the mid-eighties, the Banking Regulations Act was amended permitting commercial banks to offer a wide range of financial services through the subsidiary rule. The State Bank of India was the first Indian Bank to set-up Merchant Banking Divisions in 1972. Later ICICI set up its Merchant Banking Division followed by Bank of India, Bank of Baroda, Canara Bank, Punjab National Bank and UCO Bank. The merchant banking gained prominence during 1983-84 due to new issue boom. 1.5 MERCHANT BANKS AND COMMERCIAL BANKS There are differences in approach, attitude and areas of operation between commercial banks and merchant banks. The differences between merchant banks and commercial banks are summarized below: 2

1. Commercial banks basically deal in debt and debt related finance and their activities are appropriately arranged around credit proposals, credit appraisal and loan sanctions. On the other hand, the area of activity of merchant bankers is equity and equity related finance. They deal with mainly funds raised through money market and capital market. 2. Commercial banks are asset oriented and their lending decisions are based on detailed credit analysis of loan proposals and the value of security offered against loans. They generally avoid risks. The merchant bankers are management oriented. They are willing to accept risks of business. 3. Commercial bankers are merely financiers. The activities of merchant bankers include project counselling, corporate counselling in areas of capital restructuring, amalgamations, mergers, takeover etc., discounting and rediscounting of short-term paper in money markets, managing, underwriting and supporting public issues in new issue market and acting as brokers and advisers on portfolio management in stock exchange. Merchant banking activities have impact on growth, stability and liquidity of money markets. 1.6 SERVICES OF MERCHANT BANKS The financial institutions in India could not meet the demand for long-term funds required by the ever expanding industry and trade. The corporate sector enterprises, therefore, meet their requirements through issue of shares and debentures in the capital market. The merchant bankers also advise the investors of the incentives available in the form of tax reliefs and other statutory obligations. The services of merchant bankers are described as follows: (i) Corporate Counselling Corporate counselling covers the entire field of merchant banking activities viz. project counselling, capital restructuring, project management, public issue management, loan syndication, working capital, fixed deposit, lease financing, acceptance credit etc. The scope of corporate counselling is limited to giving 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. (ii) Project Counselling Project counselling includes preparation of project report deciding project report with the financial institutions or banks. Project reports are prepared to obtain government approval, get financial assistance from institutions and plan for the public issue. The financing mix is to be decided keeping in view the rules, regulations and norms prescribed by the government or followed by financial institutions. The projects are appraised, as to the 3

location, technical, commercial and financial viability of the project. Project counselling also includes filling up of application forms with relevant information for obtaining funds from financial institutions. (iii) Loan Syndication Loan syndication refers to assistance rendered by merchant banks to get mainly term loans for projects. Such loans may be obtained from a single development finance institution or a syndicate or consortium. Merchant Bankers help corporate clients to raise syndicated loans from commercial banks. Merchant Banks help clients approach financial institutions for term loans. The decision as to which financial institution should be approached depends on industry, location of the unit and size of project cost. The Merchant Bankers, first, make an appraisal of the project to satisfy that it is viable. The next step is designing capital structure, determining the promoter s contribution and arriving at a figure of approximate amount of term loan to be raised. The Merchant Banker has to ensure that the project adheres to the guidelines for financing industrial projects. After verifications that the project would be eligible for term loan, a preliminary meeting is fixed with financial institution. If the financial institution agrees to consider the proposal, the application is filled in and submitted along with other documents. The Merchant Bankers involvement enables the company to state that it has exercised due diligence in the exercise of obligations under various regulations. (iv) Issue Management Management of issue involves marketing of corporate securities viz., equity shares, preference shares and debentures or bonds by offering them to public. Merchant banks act as intermediary whose main job is to transfer capital from those who own it to those who need it. The issue function may be broadly dividend into pre-issue management and post issue management. In both the stages, legal requirements have to be complied with and several activities connected with the issue have to be co-ordinated. Promotional Activities : A merchant-bank functions as a promoter of industrial enterprises in India. He helps the entreprenuer in conceiving an idea, identification projects, preparing feasibility reports, obtaining Government approvals, and incentives, etc. Some of the merchant banks also provide assistance for technical and financial collaborations and joint ventures. Issue Management : In the past, the function of a merchant banker had been mainly confined to the management of new public issues of corporate securities by the newly formed companies, existing companies (further issues) and the foreign companies in dilution of equity as required under FERA. In this capacity the merchant banks usually act as sponsor of issues. They obtain consent of the Controller of Capita! Issues (now, the 4

Securities and Exchange Board of India) and provide a number of other services to ensure success in the marketing of securities. The services provided by them include, the preparation of the prospectus underwriting arrangements, appointment of registrars, brokers and bankers to the issue, advertising and arranging publicity and compliance of listing requirements of the stock- exchanges, etc. They act as experts of the type, timing and terms of issues of corporate securities and make them acceptable for the investors on the one hand and also provide flexibility and freedom to the issuing companies. Credit Syndication. Merchant banks provide specialised services in preparation of project, loan applications for raising short-term as well as long-term credit from various banks and financial institutions, etc. They also manage Euro-issues and help in raising funds abroad. Portfolio Management. Merchant banks offer services not only to the companies issuing the securities but also to the investors. They advise their clients, mostly institutional investors, regarding investment decisions. Merchant bankers even undertake the function of purchase and sale of securities for their clients so as to provide them portfolio management services. Some merchant bankers are operating mutual funds and off shore funds also. Leasing and Finance. Many merchant bankers provide. Leasing and finance facilities to their customers. Some of them even maintain venture capital funds to assist entreprenures: They also help companies in raising finance by way of public deposits. Servicing of Issues. Merchant banks have also started to act as paying agents for the service of debt-securities and to act as registrars and transfer agents. Thus, they maintain even the registers of shareholders and debenture holders and arrange to pay dividend or interest due to them. Other Specialised Services. In addition to Ore-basic activities involving marketing of securities, merchant banks also provide corporate advisory services on issues like mergers and amalgamations, tax matters, recruitment of executives and cost and management audit etc. Many merchant bankers have also started making of bought out deals of shares and debentures. The activities of the merchant bankers are increasing with the change in the money market. Merchant Banking Functions Corporate Counselling Project Counselling Capital Structuring Portfolio Management Issue Management Credit Syndication Working Capital Venture Capital Lease Finance Fixed Deposits 5

ROLE OF A MERCHANT BANKER From the above mentioned services rendered by a merchant hanker, it can be observed that he is the most critical link between a company raising funds and the investors. He plays the rule of a promoter, advisor, rehabilitaior and an agent or intermediary for corporate enterprises. He translates the ideas into ventures by providing a number of promotional services such as identification of projects, preparing feasibility reports, obtaining Government approvals, raising funds for the project, etc. After the project is promoted, a merchant banker acts as a corporate advisor and renders a number of services for.the successful running of the enterprise. His expert advice on certain issues such as financial planning, tax planning, issue management, credit syndication, investment management, etc. is of immense help to the entreprenuers. He also renders useful advice to the investors. A merchant banker also plays the role of a rehabilitaior at the time of acquisition, merger, take over, amalgamation, etc. Many merchant banks also act as agents for their client, companies for maintaining registers of shareholders and debenture holders and to act as transfer agents and paying agents for interest and dividend, etc. As things stand today, merchant bankers are masters in all trading activities. They ride the high horse in the capital market. For an industry which is just two-and-a half decades old. the merchant bankers have indeed come a long way. Starting out simply as issue managers, now these merchant bankers role extends to such services as company formation, syndication of project finance, working capital management, FERA activities, global loans, international finance, feasibility explorations, mergers, capital restructuring, corporate tax planning, leasing finance, venture capital, etc. But to provide these large variety of services, the merchant banker has to possess a number of qualities. He should be an expert in the financial market and well versed with the, activities involved in the promotion of an enterprise. Merchant banker should possess high integrity to inspire trust and confidence. He should have large resources to meet the requirements of the customers. MERCHANT BANKING REGULATIONS. SEBI (Merchant Bankers ) Regulation Act, 1992 defines a merchant banker as, any person who is engaged in the business of issue management either by making arrangements 6

regarding selling, buying or subscribing to securities or acting as manager, consultant, adviser or rendering corporate advisory service in relation to such issue management. At present no organisation can act as a merchant banker without obtaining a certificate of registration from the SEBI. However, it must be noted that a person/organisation has to get himself registered under these regulations if he wants to carry on or undertake any of the authorised activities, i.e., issue management assignment as manager, consultant, advisor, underwriter or portfolio manager. To obtain the certificate of registration, one had to apply in the prescribed form and fulfill two sets of norms (i) operational capabilities and (ii) capital adequacy norms CLASSIFICATION OF MERCHANT BANKERS The SEBI has classified merchant bankers under four categories for the purpose of registration: 1. Category I Merchant Bankers. These merchant bankers can act as issue manager, advisor, consultant, underwriter and portfolio manager. 2. 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. 3. 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 can not undertake the activities of portfolio management also. 4. Category IV Merchant Bankers. A category IV merchant banker can merely act as consultant or advisor to an issue of capital. CAPITAL ADEQUACY NORMS SEBI has prescribed capital adequacy norms for registration of the various categories of merchant bankers. The capital adequacy is expressed in terms of minimum net worth, i.e. capital contributed to the business plus free reserves. The following are the capital adequacy norms as laid down by SEBI. Capital Adequacy Norms Category of Merchant Bankers Category I Category II Category III Category IV Minimum Net Worth Rs. 1 crore Rs. 50 lakhs Rs. 20 lakhs Nil 7

FEES According to the SEBI (Merchant Bankers) Amendment Regulations, 1999, w.e.f. 30.9.1999, every merctant banker shall pay a sum of Rs. 5 lakhs as registration fees at the time of grant of certificate by the Board. The fee shall be paid by the merchant banker within 15 days of receipt of intimation from the Board. Further, a merchant banker to keep registration in force shall pay renewal fee of Rs. 2.5 lakhs every three years from the fourth year from the date of initial registration. 3 GOVERNMENT POLICY 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 transparency in their operations and to make them accountable so as to protect the investor s interest. The guidelines relate 10 pre-issue obligations, underwriting, advertisements and post-issue obligations of die merchant bankers. 3 CODE OF CONDUCT The following code of conduct has also been formulated by the SEBI for the merchant bankers: 1. A merchant banker in the conduct of his business shall observe high standards of integrity and fairness in all his dealings with the clients and other merchant bankers. 2. A merchant banker shall render at all times high standards of.service, exercise due diligence, ensure proper care and exercise independent professional judgement. He shall wherever necessary; disclose to the clients, possible sources of conflict of duties and interests, while providing unbiased services. 3. A merchant banker shall not make any statement or become privy to any act. Practice or unfair competition, which is likely to be harmful to the interests of other merchant hankers or is likely to place such other merchant bankers in a disadvantageous position in relation to the merchant banker, while competing for or executing any assignment. 4. A merchant banker shall not make any exaggerated statement whether oral or written to the client about the qualification or the capability to render certain services or his achievements m regard to services rendered to other clients. 5. A merchant banker shall always endeavor to 8

(a) render the best possible advice to the clients having regard to the clients needs and the environments and his own professional skill; and (b) ensure that all professional dealings are effected in a prompt, efficient and cost effective manner. 6. A merchant banker shall not (a) divulge to other clients, pass on any other party any confidential information about his client, which has come to his knowledge; and (b) ensure that all professional dealings are effected in a prompt, efficient and cost effective manner. 7. A merchant banker shall endeavour to ensure that (a) the investors are provided with true and adequate information without making any misguiding exaggerated claims and are made aware of attendant risks before any investment decision is taken by them; (b) copies of prospectus, memorandum and related literature are made available to the investors; (c) adequate steps are taken for fair allotment of securities and refund of application money without delay; and (d) complaints from investors are adequately dealt with. 8. The merchant bankers shall not generally and particularly in respect of issue of any securities be party to (a) creation of false market; (b) price rigging or manipulation; (c) passing of price sensitive information to brokers, members of the; stock exchanges and other players in the capital market or take any other action which is unethical or unfair to the investors. GENERAL OBLIGATIONS AND RESPONSIBILITIES The following are some of the important obligations and responsibilities of the merchant bankers : 1. Merchant banker not to associate with any business other than that of the securities market. No merchant banker, other than a bank or a public financial institution, who has been granted a certificate of registration under these regulations shall [after 30 th June, 1998] carry on any business other than that in the securities market. Notwithstanding anything contained above, a merchant banker who prior to the date of notification of the Securities and Exchange Board of India (Merchant Bankers) Amendment Regulations. 1997, has entered into a contract in respect of a business other than that of the securities market, may if he so desires, may discharge his obligations under such contract: 9

2. Maintenance books of accounts, records, etc. Every merchant banker shall keep and maintain the following books of accounts, records and documents, namely:- (a) a copy of balance sheet as at the end of each accounting period ; (b) a copy of profit and loss account for that period ; (c) a copy of the auditor s report on the accounts for that period ; and (d) a statement of financial position. Every merchant banker shall intimate to the Board the place where the books of accounts, records and documents are maintained. Without prejudice to sub-regulation (I), every merchant banker shall, after the end of each accounting period furnish to the Board copies of the balance sheet, profit and loss account and such other documents for any oilier preceding five accounting years when required by the Board. 3. Submission of half-yearly results. Every merchant banker shall furnish to the Board half-yearly unaudited financial results when required by the Board with a view to monitor the capital adequacy of the merchant banker. 4. Maintenance of books of accounts. records and other documents. The merchant banker shall preserve the books of accounts and other records and documents maintained under regulation 14 for a minimum period of five years. 5. Report on steps taken on auditor s report. Every merchant banker shall within two months from the date of the auditors report take steps to rectify the deficiencies, made out in the auditor s report. 6. Appointment of lead merchant bankers. All issues should be managed by atleast one merchant banker functioning as the lead merchant banker: Provided that, in an issue of offer of rights to the existing members with or without the right of renunciation the amount of the issue of the body corporate does not exceed rupees fifty lakhs, the appointment of a lead merchant banker shall not be essential. Every lead merchant banker shall before taking up the assignment relating to an issue, enter into an agreement with such body corporate setting out their mutual rights, liabilities and obligations relating to such issue and in particular to disclosures, allotment and refund, 7. Restriction on appointment of lead managers. The number of lead merchant bankers may not, exceed in case of any issue of 10

Size of issue Less than rupees fifty crores. Rupees fifty crores but less than rupees one hundred crores Rupees one hundred crores but less than two hundred crores No. of lead merchant bankers two three four Rupees two hundred acres but less than rupees four hundred crores five Above rupees four hundred crores Five or more as may be agreed by the Board. 8. Responsibilities of lead managers. (1) No lead manager shall agree to manage or be associated with any issue unless his responsibilities relating to the issue mainly, those of disclosures, allotment and refund are clearly defined, allocated and determined and a statement specifying such responsibilities is furnished to the Board atleast one month before the opening of the issue for subscription: Provided that, where there are more than one lead merchant bankers to the issue the responsibilities of each of such-lead merchant banker shall clearly be demarcated and a statement specifying such responsibilities shall be furnished to the Board at least one month before the opening of the issue for subscription. No lead merchant banker shall, agree to manage the issue made by any body corporate, if such body corporate is an associate of the lead merchant banker. 9. Lead merchant banker not to associate with a merchant banker without registration. A lead merchant banker shall not be associated with any issue if a merchant banker who is not holding a certificate is associated with the issue. 10. Underwriting obligations. In respect of every issue to be managed, the lead merchant banker holding a certificate under Category I shall accept a minimum underwriting obligation of five per cent of the total underwriting commitment or rupees twenty-five lacs, whichever is less: Provided that, if the lead merchant banker is unable to accept the minimum underwriting obligation, that lead merchant banker shall make arrangement for having the issue underwritten to that extent by a merchant banker associated with the issue and shall keep the Board informed of such arrangement. 11. Submission of due diligence certificate. The lead merchant banker, who is responsible for verification of die contents of a prospectus or the letter of offer in respect of an issue and the reasonableness of the views expressed therein, shall submit to the Board atleast two weeks prior to the opening of the issue for subscription, a due diligence certificate in Form C.; 11

12. Documents to be furnished to the Board. (1) The lead manager responsible for the issue shall furnish to the Board, the following documents, namely : (i) particulars of the issue (ii) draft prospectus or where there is an offer to the existing shareholders, may draft letter of offer; (iii) any other literature intended to be circulated to the investors, including the shareholders ; and be (iv) such other documents relating to prospectus or letter of offer, as the case may The documents referred to in sub-regulation (1) shall be furnished at least two weeks prior to date of filing of the draft prospectus or the letter of offer, as the case may be, with tic Registrar of Companies or with the Regional Stock Exchanges, or with both. The lead manager shall ensure that the modifications and suggestions, if any, made by the Board on the draft prospectus or the letter of offer, as the case may be, with respect to information to be given to the investors are incorporated therein. 13. Continuance of association of lead manager with an issue. The lead manager undertaking the responsibility for refunds or allotment of securities in respect of any issue shall continue to-be associated with the issue till the subscribers have received die share or debenture certificates or refund of excess application money: Provided that where a person other than the lead manager is entrusted with the refund or allotment of securities in respect of any issue, the lead manager shall continue to be responsible for ensuring that such other person discharges the requisite responsibilities in accordance with the provisions«the Companies Act and the listing agreement entered into by the body corporate with the stock exchange. 14. Acquisition of shares prohibited. No merchant banker or any of its doctors, partner or manager or principal officer shall either on their respective accounts or through their associates or relatives enter into any transaction in securities of bodies corporate on the basis of unpublished price sensitive information obtained by them during the course of any professional assignment either from the clients or otherwise. 15. Information to the Board. Every merchant banker shall submit to the Board complete particulars of any transaction for acquisition of securities of any body corporate whose issue is being managed, by that merchant banker within fifteen days from the date of entering into such transaction. 16. Disclosures to the Board. A merchant banker shall disclose lo the Board as and when required, the following information, namely : 12

(i) his responsibilities with regard to the management of the issue ; (ii) any change in the information or particulars previously furnished, which have a bearing on die certificate granted to it; (iii) the names of the body corporate whose issues he has managed or has been associated with ; (iv) the particulars relating to breach of the capital adequacy requirement; (v) relating to his activities as a manger, underwriter, consultant or adviser to an issue as the case may be. 17. Appointment of Compliance Officer. Every merchant banker shall appoint a compliance officer who shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines, instructions, etc. issued by the Board or the Central Government and for redressal of investors grievances. The compliance officer shall immediately and independently report to the Board any non-compliance observed by him and ensure that the observations made or deficiencies pointed out by the Board on/in the draft prospectus or the Letter of Offer as the case may be, do not recur. 18. Board s right to inspect. The Board may appoint one or more persons as inspecting authority to undertake inspection of the books of accounts, records and documents of the merchant banker for any of the following purposes: (i) required ; to ensure that the books of account are being maintained in the manner (ii) that the provisions of the Act, rules, regulations are being complied with ; (iii) to investigate into the complaints received from investors, other merchant bankers or any other person on any matter having a bearing on the activities of the merchant banker, and (iv) to investigate suo moto in the interest of securities business or investors interest into the affairs of the merchant banker. 19. Obligations of merchant banker on inspection by the Board. It shall be the duty of every director, proprietor, partner, officer and employee of the merchant banker, who is being inspected, lo produce to the inspecting authority such books, accounts and other documents in his custody or control and furnish him with the statements and information relating to his activities as a merchant banker within such lime as the inspecting authority may require. 13

The merchant banker shall allow the inspecting authority to have reasonable access 10 the premises occupied by such merchant banker or by any other person on his behalf and also extend reasonable facility for examining any books, records, documents and computer data in the possession of the merchant banker or any suet other person and also provide copies of documents or other materials which, in the opinion of the inspecting authority are relevant for the purposes of the inspection. The inspecting authority, in the course of inspection, shall be entitled to examine or record statements of any principal officer, director, partner, proprietor and employee of the merchant banker. It shall be the duty of every director, proprietor, partner, officer or employee of the merchant banker to give!o the inspecting authority all assistance in connection with the inspection which the merchant banker may reasonably be expected to give. 1.8 Merchant Banking Objectives The following are the main objectives of merchant banking in India; 1. The objective of merchant banking is to help for capital formation. 2. It creates a secondary market to boost the industrial activities in the nation. 3. It assists and promote economic endeavor. 4. It prepares project reports, conducts market research pre-in vestment surverys. 5. It provides financial assistance to venture capital 6. It builds a data bank as human resources 7. Providing housing finance. 8. They provide seed capital to new concerns. 9. Merchant bankers are mainly involved in issue management 10. Merchant bankers act as underwriters 11. It identifies new projects and render services to getting clearance from government. 12. Provides financial clearance. 13. Merchant bankers help to mobilise funds from public. 14. They divert the savings of the nation towards productive channel. 15. They conduct investors conferences. 16. They obtain consent of stock exchange for listing. 14

17. Obtain the daily report of application money collected at various branches of banks. 18. MBs appoint bankers, brokers, underwriters etc., 19. MBs supervise the process on behalf of NRIs for their ventures. 20. MBs provide service on fund based activities. 21. MBs assist in arrangement of loan syndication. 1.9 SCOPE FOR MERCHANT BANKING IN INDIA In the present day capital market scenario, the merchant banks play the role of an encouraging and supporting force to the entrepreneurs, corporate sectors and the investors. There is vast scope for merchant bankers to enlarge their operations both in domestic and international market. (i) Growth of New Issues Market The growth of new issue market is unprecedented since 1990-91. The amount of annual average of capital issues by non-government public companies was only about 90 crores in the 70s, the same rose to over Rs. 1,000 crs in the 80s and further to Rs. 12,700 crores in the first four years of 1990 s. This figure could be well beyond Rs. 40,000 crores by the end of 1994-95. The number of capital issues has also increased from 363 in 1990-91 to 900 in 1993-94. The trend is expected to continue in future. (ii) Entry of Foreign Investors An outstanding development in the history of Indian capital market was its opening up in 1992 by allowing foreign institutional investors to invest in primary and secondary market and also permitting Indian companies to directly tap foreign capital through euro issues. Within two years to March 1994, the total inflow of foreign capital through these routes reached to about $5 billion. It is estimated that this figure may go up to $ 35-40 billion by the turn of this century. Further, foreign direct investment as also investment by NRIs have risen considerably due to number of incentives offered to them. They need the services of Merchant Bankers to advise them for their investment in India. The increasing number of joint ventures abroad by Indian companies also require expert services of Merchant Bankers. (iii) Changing Policy of Financial Institutions With the changing emphasis in the lending policies of financial institutions from security orientation to project orientation, corporate enterprises would require the expert services of merchant bankers for project appraisal, financial management etc. The policy of decentralisation and encouragement of small and medium industries will further increase the demand for technical and financial services which can be provided by merchant bankers. 15

(iv) Development of Debt Market The concept of debt market has set to work through National Stock Exchange and the Over the Counter Exchange of India. Experts feel that of the estimated capital issues of Rs. 40,000 crores in 1994-95, a good portion may be raised through debt instruments. The development of debt market will offer tremendous opportunity to Merchant Bankers. 5. Innovations in Financial Instruments The Indian capital market has witnessed innovations in the introduction of financial instruments such as non-convertible debentures with detachable warrants, cumulative convertible preference shares, zero coupon bonds, deep discount bonds, triple option bonds, secured premium notes, floating rate bonds, auction rated debentures etc. This has further extended the role of Merchant Bankers as market makers for these instruments. 6. Corporate Restructuring As a result of liberalisation and globalisation the competition in the corporate sector is becoming intense. To survive in the competition, companies are reviewing their strategies, structure and functioning. This had led to corporate restructuring including mergers, acquisitions, splits, disinvestments arid financial restructuring. This offers good opportunity to Merchant Bankers to extend the area of their operations. 7. Disinvestment The government raised Rs. 2000 crores through disinvestment of equity shares of selected public sector undertakings in 1993-94. The government proposes to shift the present method of periodic sale of public sector shares to round the year off loading of shares directly on the stock exchange from the year 1995-96. The government will sell the shares of identified public sector at any time during the year when they get a good price above minimum stipulated level. This is likely to provide good business to Merchant Bankers in future. The above discussion highlights, that the scope of merchant banking is vast and there lies immense opportunities ahead of Merchant Bankers. They should develop adequate infrastructure including expertise in order to provide full range of merchant banking services to corporate sector. QUESTIONS I. True or False: 1. Loan syndication refers to getting term loans for projects from consortium. 2. The most common method of public issue is through private placement. 16

3. Bankers to the issue accept applications along with subscriptions through their designated branches. 4. A new company can freely price the issue. 5. Brokers to the issue canvass subscription and undertake publicity. [Key: 1. True, 2. False, 3. True, 4. False, 5. True] II. Fill in the blanks: 1. The minimum networth for the first category of merchant banker is Rs. 2. A merchant banker can claim a charge % as the commission for the whole issue. 3. The direct sale of securities to investors is called 4. Merchant banks deal with funds raised through and 5. The lead merchant banker under category I shall accept a minimum underwriting of % of total underwriting commitment or Rs. which ever is less. [Key. 1. Rs. 1 crore, 2. 0.5%, 3. private placement. 4. money market and capital market, 5. 5% - Rs. 25 lakhs.] III. Short Answers: 1. What is portfolio management? 2. Define merchant banker. 3. State the qualities required of a merchant banker. 4. Discuss the problems of merchant bankers in India. 5. Write a note on Project counselling. IV. Essay Type: 1. Distinguish between commercial bank and merchant bank. 2. The scope for merchant banking is great in India. Discuss. 3. Explain the services of merchant bankers. 4. Explain in detail the pre-issue management. 5 Discuss the guidelines for Merchant Bankers issued by SEBI. 17