Merchant Banking

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essentials of merchant banking

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Prepared by:
Rekha Rao Subraveti
“An organization that underwrites securities for
corporations, advices such clients on mergers, and is
involved in the ownership of commercial ventures.”
- M.J.Rosenberg

“Merchant banks are financial institutions providing
specialized services which generally include the
acceptances of Bills of exchange, corporate finance,
portfolio management and other banking services.”
- D.Cox
A Financial Institution or
an Organization
 Merchant banking started in Italy in late medieval times
 Reached France during the seventeenth century
 Italian merchant bankers introduced Merchant banking
into England in eighteenth century
 European bankers developed merchant banking In USA
 In 1972, merchant banking started in South Africa
 In 1967, National Grindlays Bank started merchant
banking in India
 The SBI was the First Indian Commercial Bank to set up
Merchant Banking division in 1972.
 It gained momentum and prominence during 1983-84 due
to new issue boom.
 Mainly concerned with long term financing of
business enterprises and marketing of stocks and
bonds
 They are merchandisers whose stock-in-trade is stock
and bonds (buy securities from issuing companies and
sell them at wholesale or retail prices to security
dealers and individual investors respectively)
 They render expert advice on the type and form of
securities that appeal to investors
 They may act as underwriters or brokers to a new issue

 To help in the capital formation in the country
 To create secondary market and enhance industrial activity
in the country
 To assist and promote economic growth
 To prepare project reports, conduct market research and
pre-investment surveys
 To provide financial assistance to venture capital
 To provide housing finance
 To provide seed capital to new concerns
 Mainly involved in Issue Management
 To act as underwriters
 To provide financial clearance and government clearance
for new feasible projects


 The various functions include,
 Corporate Counselling
 Project Counselling
 Loan Syndication
 Pre-investment Activities
 Capital Restructuring Services
 Issue Management & Underwriting
 Portfolio Management
 Working Capital Finance
 Other allied functions like, M & As, Venture
Capital, Lease Finance, Foreign Currency
Finance, Mutual Funds etc.
Corporate Counselling
• Covers the entire field of Merchant Banking.
• Scope is limited to giving suggestions and
opinions to the client and help taking actions to
solve their problems.
• Helps to ensure better performance, steady growth
and create better image to investors.
• Includes preparation of project reports, deciding on the
financing pattern
• Appraising the project report with financial institution or
banks
• Obtaining governmental approval and plan for public issue
• Also includes filling of application forms and other
formalities as specified by financial institutions.
Loan Syndication
• Refers to assistance rendered to get mainly term loans for
projects.
• May be obtained from a single FI or from a syndicate or
consortium.
• Services include appraising the project, design of capital
structure, determine promoter’s contribution, ensuring
project adherence to guidelines of FIs, fixation of
preliminary meetings with FIs to loan release by FI or
consortium.
• Involves making a detailed feasibility exploration of
evaluating avenues of capital investment
• Indepth investigation of environment, regulatory factors,
location of raw material, demand projections are also
involved
• Helps in identifying and short listing projects
• Also conducts studies for foreign companies willing to
participate in JVs in India

• Refers to altering the capital structure of a firm so as to
minimize the cost of capital and maximize the returns.
• Requires reallocating the resources to improve their
availability.
• Suggest strategies to widen the capital base, diversify the
operations and implement various schemes
• Services offered include determining the extent of
capitalization required, writing the memorandum for the
Controller of Capital Issues etc.


Issue Management & Underwriting
• Involves marketing of securities, namely, equity shares,
preference share and debentures to the general public
• They act as intermediary in the process
• Is concerned with the management of public issue
• Aims at mobilization of money from capital markets
• Activities include, preparation of action plan, total expenses
budget, drafting and printing the prospectus, providing
assistance in launching the issue, selection of brokers and
underwriters to the issue, arranging stock exchange
clearance and listing of securities.
• Refers to maintaining proper combination of securities so
that they give maximum returns with minimum risk
• Requires decision making with respect to quantum, timing
and type of security to be bought
• Activities include, undertaking investment in securities,
investments for NRIs on both repatriation and non-
repatriation basis, safe custody of securities on behalf of
investors, providing advice on selection of investments,
maintaining investment records and providing tax
counselling & filing of tax returns

• Merchant Banking offers services with respect to working
capital of a company like,
• Assessment of working capital requirement
• Preparation and negotiation of credit facilities
• Assisting, coordinating and expediting the
documentation procedure and other formalities for
disbursement
• Advising on the issue of debentures etc.

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