Definition of Merchant Bankers

The word ‘issues’ in the definition refers to an offer for sale/ purchase of securities by any Body-Corporate/other person or group of persons on its / his / their behalf to, or from the public or, from the holders of the securities through a Merchant Banker.

Categories of Merchant Bankers

Merchant Bankers fall under four categories:-

Category 1 – Merchant Bankers of this category can carry on anyactivity relating to issue management. The activities are as follows:

Preparation of Prospectus and other information relating to issue,

Determining the financial structure,

Tie-up of financiers,

Final allotment of securities

Refund of subscribes etc.,

They could also act as Advisors, Consultants, Co-Managers, Underwriters or Portfolio Managers.

Category II – Merchant Bankers of this category can act as Advisors,Consultants, Co-Managers, Underwriters and Portfolio Manager.

Category III - Merchant Bankers of this category can act asUnderwriters, Advisors and Consultants to an issue.

Category IV - Merchant Bankers of this category can act only asAdvisors or consultant to an issue.

All the categories below Category – 1 were abolished by SEBI on 5th September 1997. Those operating below category-1 have to apply for Category-1 status.

Registration of Merchant Bankers

Registration of Merchant Bankers with the SEBI is compulsory to carry out their activities. With effect from 9/12/1997 SEBI registers only category I merchant Bankers. A separate certificate of Registration from SEBI is required to carry on activities as portfolio managers.

Matters considered by SEBI for grant of certificate of Registration

Merchant Bankers should also be a body corporate other than non-banking financial company.

Merchant Bankers must have necessary infrastructure such as place, equipment and manpower to effectively discharge their activities.

Merchant Bankers must have employed at least 2 persons with experience to conduct merchant banking business.

Merchant Bankers should fulfill the capital adequacy requirement of minimum net worth (net worth means paid up capital and free Reserves) of ` 5 crore.

Any person either directly or indirectly connected with the applicant that is an associate/subsidiary/interconnected/group company cannot have a Certificate of Registration from SEBI.

The merchant Bankers/their partners/their directors/principal officers should not be involved in any litigation connected with the securities market, which has an adverse effect on their business.

The merchant Bankers should have recognized professional qualification in Finance, Law or Business Management. Their Registration should be in the interest of the investors. The applicant must be a fit and proper person as per the criteria specified in the SEBI intermediaries Regulation 2008.

Fees Payable

The Merchant Bankers have to pay to the SEBI the following fees:-

Application fee of ` 25,000/-.

Registration fee ` 10 lakh (registration is valid for 3 years from the date of registratrion).

Renewal ` 5 Lakh.

Functions of Merchant Bankers

Corporate Counseling

Project Counseling

Pre investment studies

Capital Restructuring

Credit Syndication and Project Finance

Issue Management and underwriting

Portfolio Management

Working Capital Finance

Acceptance of credit and bill discounting

Merger, Amalgamation and Takeover

Venture capital

Lease Financing

Foreign Currency Financing

Fixed Deposits Broking

Mutual Funds

Brief descriptions of these functions are given below:

Corporate Counseling

A set of activities undertaken to ensure the efficient running ofa corporate enterprise is known as corporate counseling. The merchant banker is guiding in the following activities:

Diversification based on the Government’s economic and licensing policies.

Appraisal of product lines, analyzing their growth and profitability and forecasting future trends.

Diagnosing sick units, assessing revival prospects for rehabilitation by way of modernization and diversification, suggesting suitable strategy for improving their production technology and financial structure.

Arranging funds for rehabilitation through banks/financial institutions.

Monitoring of rehabilitation schemes.

Assisting takeover of sick units

Project Counseling

Project counseling is the feasibility study of the project with reference to various aspects such as financial, economical, commercial technical etc... It includes the following activities:

Review of project idea, conducting feasibility study and providing advice for implementation.\

Providing assistance in the preparation of project reports, conducting market surveys and obtaining government consents (approvals/licenses/permissions/grants) for implementation of the project.

Providing guidance in making investment in Indian projects in India and abroad.

Arranging and negotiating foreign collaborations, amalgamations, mergers, and takeovers.

Pre-Investment Studies

It is a detailed feasibility study to evaluate alternative avenues of capital investment in terms of growth and profit prospects. Activities related to pre-investment studies are:

Analyzing environment and regulatory factors

Identification of raw material sources

Estimation of demand

Estimation of financial requirements

Capital Restructuring Services

Capital restructuring aims to reduce the cost of capital and maximize the shareholders wealth. Merchant bankers provide the following services related to capital restructuring:

Determination of optimum capital structure conforming to legal requirements.

Getting consent of controller of Capital issues for capitalization of reserves by way of issuing bonus shares.

Credit Syndication

Credit syndication refers to activities connected with credit procurement and project financing, aimed at raising Indian and foreign currency loans from banks and financial institutions, are collectively known as ‘credit syndication’. The activities are:

Estimating the total cost of the project and drawing up a financing plan for the total project cost.

Preparing loan application for financial assistance from term lenders/financial institutions/banks, and monitoring their progress, including pre-sanction negotiations.

Selecting institutions and banks for participation for financing.

Issue Management and Underwriting

Issue management and underwriting is concerned with the activities of management of the public issues of corporate securities, viz. equity shares, preference shares, and debentures of bonds to procure money from the capital market. The activities and SEBI guidelines in this regard are discussed later elaborately in this unit.

Portfolio Management

Portfolio management is making investment decisions in marketable securities for maximizing returns with minimum risk.

The services are

Providing advice on selection of investments.

Carrying out a critical evaluation of investment portfolio.

Collecting and remitting interest and dividend on investment.

Undertaking investment in securities.

Safe custody of securities in India and overseas.

Undertaking review of Provident fund investment, Trust investment, etc.

Working Capital Finance

Working Capital finance is the fund required to meet the day-to-day expenses of an enterprise. The related activities are:

Assessment of working capital requirements.

Facilitating sanction of credit facilities speedy disbursements.

Acceptance Credit and Bills Discounting

‘Acceptance credit and bill discounting’ means activities relating to acceptance and discounting of bills of exchange and advancement of loans on the strength of such instruments.

Merger and Acquisition

The merchant banker arranges for negotiating acquisitions and mergers by offering expert valuation regarding the quantum and the nature of considerations, and other related matters. The activities relating to merger and acquisition are:

Conducting SWOT analysis in order to help formulate guidelines and directions for future growth.

Conducting studies for locating overseas markets, foreign collaborations and prospective joint venture associates.

Obtaining approvals from shareholders and other stakeholders

Monitoring the implementation of merger and amalgamation schemes.

Venture Capital Financing

Venture capital is the seed capital in the form of equity financing for high-risk and high-reward projects. It is discussed in detail in unit 4.

Lease Financing

Leasing is one of the fund based financial services of merchant banker. Leasing means ‘letting out assets on lease’ for use by the lessee for a particular period of time. Merchant banker provides the following services:

Providing advice on the viability of leasing

Providing advice on the choice of a favorable rental structure.

Foreign Currency Financing

Foreign currency finance is the fund provided for foreign trade transactions in the form of export-import trade finance, euro currency loans. The role of merchant bankers in this regard is:

Assisting the study of turnkey project and construction of contract projects.

Liaison with RBI, EXIM, ECGC and other institutions.

Providing assistance in opening and operating banks accounts abroad.

Assisting in obtaining export credit facilities and letter or credit.

Providing guidance on forward cover for exchange risk.

Arranging foreign currency guarantees.

Arranging various types of foreign currency loans such as Euro-currency Loans, Syndication of Euro loans, Bank guarantees etc.

Brokering Fixed Deposits

The merchant bankers render the following services

Working out the quantum of procurement of fund in the form of deposits from the public

Drafting of advertisement for inviting deposits and filing a copy of it with the registrar of Companies for registration.

Arranging payment of interest amounts.

Advising on the terms and conditions of fixed deposits the company.

Mutual Funds