merchant banking fin
TRANSCRIPT
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Meaning:
The word merchant bank does not have a f ixed def ini t ion as
this term is used di f ferent ly in di f ferent countr ies . In Uni ted
States these are cal led as Inv estment Banks and in UK they
are cal led as accept ing and i ssuing houses.
The not i f icat ion of Minis t ry Of Finance in India def ines
Merchant Banker as any person who is engaged in the
business of i ssue management ei ther by making ar rangements
regarding sel l ing, buying, or subscr ibing to the secur i t ies as
manager , consul tant , adviser in relat ion to such an i ssue
management . In general the merchant banks are the f inancial
inst i tut ion which provides f inancial services , solut ions , &
advice to corporate houses. Some of the wor ld famous
merchant banks are Goldman Sachs, Credi t Suisse & Mo rgan
Stanley etc . In India there are many banks which are into the
f ield of merchant banking some of the banks are ICICI , State
Bank Of India , Punjab Nat ional Bank etc .
Merchant banking an overview:-
Company raises capi tal by i ssuing secur i t ies in market .
Merchant bankers at as intermediar ies between the i ssuer of
capi tal and the ul t imate investor who purchase these secu r i t ies .
Merchant banking. is the f inancial in termediat ion
that matches the ent i t ies that need capi tal and those that have
capi tal? I t i s funct ion that faci l i ta tes the f low of capi tal in the
market .
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DEFINITION:
In banking , a merchant bank i s a f inancial inst i tut ion
pr imar i ly engaged in of fer ing f inancial services and advice to
corporat ions and weal thy individuals on how to use thei r
money. The term can also be used to descr ibe the pr ivate equi ty
act ivi t ies of banking.
According to Cox, D. merchant banking is def ined as ,
merchant banks are the f inancial inst i tu t ions providing
special i s t services which general ly include the acceptance of
bi l l s of exchange, corporate f inance, por t fol io management and
other banking services.
The Not i f icat ion of the Minis t ry of Finance def ines a merchant
banker as , any person who is engaged in the business of
i ssue management ei ther by making arrangements regarding
sel l ing, buying or subscribing to securi t ies as manager,
consultant , advisor or rendering corporate advisory service
in re lat ion to such issue management.
In short , merchant bankers assis t in rais ing capi tal and advice
on related i ssues.
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History and Origin of Merchant Banking In Ind ia
ORIGIN
Merchant banking or iginated through the enter ing of London merchants in foreign t rade through acceptance
of bi l l . Later , the merchants assis ted the Government of
under developed countr ies in rais ing long terms
through f loatat ion of bonds in London money market .
Over a per iod they extended thei r act ivi t ies to domest ic
business of syndicat ion of long term and shor t term
finance, underwri t ing of new issues, act ing as regis t rars
and share t ransfer agents , debenture t rustees , por t fol io
managers , negot iat ing agents for mergers , takeovers
etc .
Merchant Banking in India Historical Perspective:
Til l 18 t h century moneylenders , moneychangers , vi l lage
merchants (maharanis) , & saucers per formed the funct ion of
banks & merchant banks. They also i ssued & discounted bi l l sof exchange (handiest ) & bank draf t . They gave loans on
mutual t rust , on mor tgage of lands, ornaments & other
proper ty. JAGAT SHETH (1720-1773AD, BENGAL) HABIB &
SONS which i s now HABIB BANK (founded in 1941, now is in
PAKISTAN). These were the organized merchant bankers in
recent his tory of INDIA.
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Merchant Banking is an act ivi ty that includes corporate
f inance act ivi t ies , such as advice on complex f inancings,
merger and acquisi t ion advice ( internat ional or domest ic) ,
and at t imes direct equity investments in corporat ions by
the banks.
Merchant banks are pr ivate f inancial inst i tut ion. Thei r pr imary
sources of income are PIPE f inancings and internat ional t rade.
Thei r secondary income sources are consul t ing, Mergers &
Acquisi t ions help and f inancial market speculat ion. Because
they do not invest against col la teral , they take far greater r i sks
than t radi t ional banks. Because they are pr ivate , do not take
money f rom the publ ic and are internat ional in scope, they are
not regulated.
Anyone considering deal ing with any merchant bank should
invest igate the bank and i ts managers before seeking their
help .
The reason that businesses should develop a working
relat ionship wi th a merchant bank is that they have more
money than venture capi tal i s t s . Thei r advice tends to be more
pragmat ic than venture capi tal i s t s . I t i s rare for a merchantbank to fai l . The last major fai lure was Bar ings Bank (199 2) . I t
fa i led because of unsupervised t rading of copper futures
contracts and buybacks. When the Dot Com Bubble burst in
2001, scores of venture capi tal f i rms fai led. The greatest
merchant bank fai lure in his tory was the Knights Templar .
Af ter the Crusades, the Order became immensely weal thycontrol l ing and funding the t rade between the Middle East and
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Western Europe. They fool ishly loaned money to the French
Government . To avoid repaying the money, King Louie had the
Pope declare the Order heret ics . Thousands of monks lost thei r
l ives , but France balanced i t s budget .
To understand Merchant Banks, you should know something of
thei r his tory. Modern merchant banking s tar ted in I ta ly dur ing
the 7th Century. The banking pract ices evolved f rom the
f inancing s t ructure of the Si lk Road Trading that predates the
Roman Empire.
The basic f inancing s t ructure was the advance payment for
goods by merchant bankers at a great discount to the del ivery
value of those goods. In the case of I ta ly and then Germany,
wheat was the product . The merchant banks purchased the
wheat soon af ter plant ing. They accepted the r i sk of crop
fai lure .
They prof i ted when they sold the wheat . In most countr ies
today, the nat ional government accepts the r i sk through
government crop insurance.
As the Br i t i sh Empire expanded in the 18th and 19th Centur ies ,
merchant banks prospered in London. For instance, merchant
bankers funded Canadas Hudson Bay Company. This per iod
saw the r i se of such merchant banks as Schroders , Warburgs or
Rothschi lds . Amsterdam benef i ted f rom the t rade created by
the Dutch East Indian Company. Since the 18th century, the
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role of the merchant banker has been considerably broadened to
include a composi te of modern day ski l l s . Such ski l l s are
inherent ly ent repreneur ial , manager ial , f inancial and
t ransact ional .
Today, Nor th American merchant banks have taken the form of
"bout iques"- whereby, each of fers i t s own special ized services .
The hal lmarks of these merchant bank bout iques are that they
typical ly charge fees payable in cash and/or the cl ient ' s s tock
for each service rendered. You can f ind a merchant bank that
meets any reasonable set of needs.
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Merchant Banking in India Post Independence:
In 1967, RBI i ssued i t s f i r s t merchant banking l icense to gr ind
lays s tar ted wi th management of capi tal i ssues, product ion
planning, system design and also market research. I t provides
management consul t ing services as wel l . Ci t ibank setup i t s
merchant banking divis ion in 1970. i t s scope includes assis t ing
new ent repreneur , evaluat ing new projects , ra is ing funds
through borrowing and issuing equi ty . Indian banks s tar ted
banking services as a par t of mul t iple services they of fered to
cl ients f rom 1972. State bank of India started the merchant
banking divis ion in 1972. In the ini t ia l years the object ive was
to render corporate advice and assistance to smal l and
medium entrepreneurs. Merchant banking act ivi t ies are
organized and under taken in several forms. Commercial banks
and foreign development f inance inst i tut ions have organized
them through format ion of divis ion; nat ional ized banks have
formed subsidiar ies companies and share brokers and
consul tancies const i tuted themselves into publ ic l td . Co. or
regis tered themselves as pr ivate l td . companies . Some of them
have equi ty s take of foreign merchant bankers .
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Main Objectives Of Merchant Bankers
Merchant bankers render their special ized assistance in
achieving the main object ives which are presented below :
1. To car ry on the business of merchant banking, assis t inthe capi tal format ion, manage advice, underwri te , provide
standby assis tance, secur i t ies and al l kinds of investments
issued, to be i ssued or guaranteed by any company,
corporat ion, society, f i rm, t rust person, government ,
municipal i ty , c ivi l body, publ ic author i ty establ ished in India .
2 . The main object of merchant banker i s to create secondarymarket for bi l l s and discount or re-discount bi l l s and acts as an
acceptance house.
3 .
Merchant bankers another object ive i s to set up andprovide services for the venture capi tal technology funds.
4 . They also provide services to the f inance housing schemesfor the const ruct ion of houses and buying of land.
5 . They render the services l ike foreign exchange dealer ,money exchange, and author ized dealer and to buy and sel l
foreign exchange in al l lawful ways in compl iance wi th the
relevant laws of India .
6 . They wi l l invest in buying and sel l ing of t ransfers ,hypothecate and deal wi th dispose of shares , s tocks,
debentures , secur i t ies and proper t ies of any other co mpany.
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Functions of a merchant banker..
The fol lowing comprise the main funct ions of a merchant
banker :
1. Management of debt and equity of ferings: -This forms the main funct ion of the merchan t banker .
He assis ts the companies in rais ing funds f rom the market .
The main areas of work in this regard includes :
inst rument designing, pr icing the i ssue, regis t rat ion of th e
offer document , underwri t ing suppor t , and market ing of
the i ssue, a l lotment and refund, l i s t ing on s tock
exchanges.
2. Placement and distribut ion:-the merchant banker helps in dis t r ibut ing var ious
secur i t ies l ike equi ty shares ,debt inst rument , mutual fund
product , f ixed deposi t , insurance products , commercial
paper to name a few. The dis t r ibut ion network of the
merchant banker can be classi f ied as inst i tut ional and
retai l in nature. the inst i tut ional network consis t of
mutual fund, foreign inst i tut ional investor , pr ivate equi ty
funds, pension fund, f inancial inst i tut ion etc . the s ize of such a network represents the wholesale reach of the
merchant banker . The retai l network depends on
networking wi th investors .
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3. Corporate advisory services: -Merchant bankers of fer customized solut ions to thei r
cl ient s f inancial problems. The fol lowing are the main
areas in which thei r advice i s sought .
4. Financial structuring:-Includes determining the debt -equi ty rat io and
gear ing rat io for the cl ient : the appropr iate capi tal
s t ructure theory i s a lso f ramed. Merchant banker also
explores the ref inancing al ternat ives of the cl ient andevaluate cheaper source of fund. Anoth er area of advice i s
habi l i ta t ion and turnaround management . In case of s ick
uni ts , merchant banker may design a revival package in
coordinat ion wi th banks and f inancial inst i tut ion. Risk
management i s another area where adv ice f rom a merchant
banker i s sought . He advice the cl ient on di f ferenthedging s t rategies and suggest the approp r iate s t rategy.
5. Project advisory service: -Merchant banker help thei r c l ients in var ious s tage
of project under taken by the cl ients . They assis t them in
conceptual izing the project idea in the ini t ia l s tage. Once
the idea i s formed, they conduct feasibi l i ty s tudies to
examine the viabi l i ty of the proposed project . They also
assis t the cl ient in prepar ing di f ferent document l ike the
detai l project repor t .
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6. Loan syndicat ion:-Merchant banker ar ranges to t ie up loans for thei r
cl ients . This take place in a ser ies of s tep. Fi rs t ly they
analyze the pat tern of the cl ients cash f lows, based on
which the terms of borrowing can be def ined. Then the
merchant banker prepares a detai led loan memorandum,
which i s c i rculate to var ious banks and f inancial
inst i tut ion and they are invi ted to par t ic ipate in the
syndicate . The banks then negot iate the terms of lending
on the basis of wi tch the f inal a l locat ion i s done.
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Importance and Need of merchant banking
Impor tant reason for the growth of merchant banking has been
developmental act ivi ty throughout the country, exer t ing excess
demand on the sources of funds for ever expanding
indust ry and t rade, thus, leaving a widening gap under
br idged between the supply and demand of invent ible funds.
Al l Indian f inancial inst i tut ions and exper ienced resources
const raint to meet the ever increasing demands for funds f rom
the corporate sector enterpr ises . In the ci rcumstances corporate
sector had the only al ternat ive to avai l of the capi tal market
services for meet ing thei r long- term f inancial requirements
through capi tal i ssues of equi ty and debentures . With the
growing demand for funds there was pressure on capi tal market
that enthused the commercial banks, share brokers and
f inancial consul tant f i rms to enter into the f ie ld of merchant
banking and share the growing capi tal markets . With the resul t ,
a l l the commercial banks in nat ional ized and publ ic sector as
wel l as in pr ivate sector including the foreign banks in India
have opened thei r merchant banking windows and are
compet ing in this f ie ld . There has been a mushroom growth of
f inancial consul tancy f i rms and broker f i rms doing advisory
funct ions as wel l as managing publ ic i ssues in syndicat ion wi th
other merchant bankers .
Notwi thstanding the above facts , the need of merchant banking
inst i tut ions i s fe l t in the wake of huge publ ic savings lying
st i l l untapped. Merchant banks can play highly s igni f icant role
in mobi l iz ing funds of savers to invest ible channels assur ing
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promising return on investments and thus can help in meet ing
the widening demand for invest ible funds for economic
act ivi ty .
With the growth of merchant banking profession corporate
enterpr ises in both publ ic and pr ivate sectors would be able to
raise required amount of funds annual ly f rom the capi tal
market to meet the growing requirements for funds for
establ ishing new enterpr ises , under taking
expansion/modernizat ion/diversi f icat ion of the exis t ing
enterpr ises . This reinforces the need for a vigorous role to be
played by merchant banks.
Merchant banks have been procuring impressive support
from capital market for the corporate sector for f inancing
their projects . This i s evidenced f rom the increasing amount
raised form the capi tal market by the corporate enterpr ises year
af ter year .
In view of mul t i tude of enactments , rules and regulat ions,
guidel ines and of fshoot press release inst ruct ions brought out
by the government f rom t ime to t ime imposing s tatutory
obl igat ions upon the corporate sector to comply wi th al l those
requirements prescr ibed therein, the need of ski l led agency
existed which could provide counsel ing in these mat ters in a
package form. Merchant bankers , wi th thei r ski l l s , updated
informat ion and knowledge, provide this service to the
corporate uni ts and advise them on such requirements to be
compl ied wi th for rais ing funds f rom the capi tal market under
di f ferent enactments viz . Companies Act , Income- tax Act ,
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Foreign Exchange Regulat ion Act , Secur i t ies Contracts
(Regulat ion) Act and var ious other corporate laws and
regulat ions. Merchant bankers advise the investors of the
incent ives avai lable in the form of tax re l iefs , o ther s ta tutory
relaxat ions, good return on investment and capi tal appreciat ion
in such investment to mot ivate them to invest thei r savings in
secur i t ies of the corporate sector .
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Scope for merchant banking in India:-
Scope for merchant banking depends upon size of the
market , restrict ion- l iberat ion, banking pol ic ies , corporate
culture, and corporate dynamics.
1 . Size and dynamics of the market : Indian market i sgrowing. In fact India i s one of the largest emerging
markets . Obviously, publ ic i ssues, FDI , debt rais ing are on
r ise . Lots of new and green f r ied projects are happening.
Merchant bankers have lots space to contr ibute .
2 . Restrict ions- l iberal izat ion : more l iberal the market i s ,more the things lef t to be decided by the corporate .
Merchant bankers assis t in decis ion making and hence
thei r scope increases . With s igni f icant market f reedom,
merchant bankers work has increased many folds .
3 . Banking pol ic ies : RBI prefers that commercial banks donot indulge in merchant banking business di rect ly . They
should setup a subsidiary for the purpose. This l imi ts
scope of commercial banks and gives space to merchant
bankers . This pol icy also resul ts in fai r business
pract ices . Some countr ies a l low commercial bankers to get
involved in IPOs, placement of debentures , e tc . Indian
scenar io i s favorable to merchant bankers .
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4 . Corporate cul ture: corporate can do project appraisal ,s t rategic rest ructur ing in house as wel l . I f the corporate
prefer thi rd-par ty independent assessment , then only they
wil l engage merchant bankers . Otherwise merchant
bankers role i s on ly s ta tu tory as in i ssue management .
India inc. apparent ly prefers and is happy wi th merchant
bankers work.
5 . Corporate dynamics : more happening in business givesmore oppor tuni t ies to merchant bankers . Mergers ,
takeover acquisi t ion, new Greenf ield projects , fund
rais ing for government inst i tut ions, act ive money market
are al l providing bet ter business prospectus to merchant
bankers .
6 . Growth of Primary market : I f the pr imary market growsand number of i ssues increases , the scope of merchant
banking wi l l be enhanced.
7 . Entry of Foreign Investors: Now India capi tal marketdi rect ly taps foreign capi tal through euro i ssues.FDI i s
increased in capi tal market . So Merchant bankers are
required to advice them for thei r inv estment in India . The
increasing number of joint ventures also requires exper t
services of Merchant Bankers . I f more and more NRIs
par t ic ipate in capi tal market , there wi l l be great demand
for merchant banker services .
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8 . Changing pol icy of Financial Inst i tut ions: Now thelending pol icies of f inancial inst i tut ions are based on
project or ientat ion, So the merchant banker services wi l l
be needed by corporate enterpr ise to provide exper t
guidance.
9 . Development of debt markets: I f the debt market i senhanced, there wi l l be t remendous scope for Merchant
bankers . Now NSE and OTCEI are planned to raise thei r
fund through debt inst ruments .
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REGISTRATION PROCESS OF
MERCHANT BANKING
MERCHANT BANKER without holding a cer t i f icate of
regis t rat ion granted by the Secur i t ies and Exchange Board of
India cannot act as a merchant banker .
SEBI wi l l grant cer t i f icate to Merchant banker i f i t
fol lows the fol lowing condi t ion: -
Merchant banker should be a body corporate and should notbe non banking f inance company
They must have a necessary inf rast ructure for maintaining anoff ice
They must have employed a minimum of 2 persons wi thexper ience in merchant banking business .
They should not be connected wi th any company di rect ly orindi rect ly .
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Procedure for get t ing registrat ion
An application should be submitted to
SEBI in Form A of the SEBI (Merchant
Bankers) Regulations, 1992.
SEBI shall consider the application and on being satisfied
issue a certificate of registration in Form B of the SEBI
(Merchant Bankers) Regulations, 1992
Rs. 5 lakhs should be paid within 15 days of date of receipt of
intimation regarding grant of certificate
t he certificate is valid only for a period of 3 years
Three months before the expiry period, an application should
be submitted to SEBI in Form A of the SEBI (MerchantBankers) Regulations, 1992. SEBI shall consider the
application and on being satisfied renew certificate of
registration for a further period of 3 years.
Rs. 2.5 lakhs which should be paid within 15 days of date of
receipt of intimation regarding renewal of certificate.
Failing to payregistration
fees
Cancellation
of certificate
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CAPITAL STRUCTURE DECISION:-The capi tal requi rement depends upon the category. The
minimum net wor th requirement for act ing as merchant banker
is given below:
Category I Rs. 5 crores Category I I Rs, 50 lakhs Category I I I Rs. 20 lakhs Category IV Nil
The categor ies for which regis t rat ion may be granted are given
below
Category I to car ry on the act ivi ty of i ssue managementand to act as adviser , consul tant , manager ,
underwri ter , por t fol io manager .
Category I I - to act as adviser , consul tant , co-manager ,underwri ter , por t fol io manager .
Category I I I - to act as underwri ter , adviser or consul tantto an i ssue
Category IV to act only as adviser or consul tant to ani ssue
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Obligations and responsibil ities
Code of conduct: -Every merchant banker has to abide by the code
of conduct as speci f ied below. A merchant banker in the
conduct of his business has to observe s tandards of integr i ty
and fai rness of a l l his deal ings wi th the cl ients and other
merchant bankers . He ought to render at a l l t imes high
standards of service, exercise due di l igence, ensure proper care
and exercise independent professional judgment . He has to ,
wherever necessary, disclose to his c l ients , the possible
sources of conf l ic t of dut ies and interest , whi le providing
services . He cannot made any s tatement o r become pr ivy to any
act , pract ice unfai r compet i t ion, which i s l ikely to be harmful
to interest of other merchant bankers or i s l ikely to place such
other merchant banker in a disadvantageous posi t ion in relat ion
to him, whi le compet ing for , or execut ing, any assignment . He
should not make any exaggerated s tatement , whether oral or
wr i t ten, to the cl ient e i ther about his qual i f icat ion or his
capabi l i ty to other c l ients . A merchant banker always to
endeavors to:
1) Render the best possible advice to the cl ients regardingcl ients the needs and requirements , and his own professional
ski l l ; and
2) Ensure that a l l professional deal ing are af fected inprompt , ef f ic ient and cost ef fect ive manner
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He should not : -1) Divulge to other c l ients , press or any other par ty anyother par ty conf ident ial informat ion about his c l ient , which
has come to his knowledge; and
2) Deal in the secur i t ies of any cl ient company wi thoutmaking disclosure to the SEBI as per the regulat ions and
also the Board of Directors of the cl ient company.
He should endeavor to ensure that : -1) The investors are provided wi th t rue and adequateinformat ion wi thout making any misguided or exaggerated
claims, and are made aware of a t tendant r i sks before any
investment decis ion i s taken by them;
2) The copies of prospectus , memorandum and relatedl i terature are made avai lable to the investors
3) Adequate s teps are taken for the fai r a l lotment of secur i t ies and refund of appl icat ion money wi thout delay;
and
A merchant banker should not general ly and par t icular ly in
respect of the i ssue of any secur i t ies be par t to
a) Creat ion of false market ;
b) Pr ice r igging or manipulat ions; and
c) Passing of pr ice sensi t ive informat ion to brokers ,
members of s tock exchanges and other players in the capi tal
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market or take any other act ion which i s unethical or unfai r
to the investors .
Final ly , he has to avoid by the provis ions
of the SEBI Act , i t s rules and regulat ions which may be
appl icable and relevant to the act ivi t ies car r ied on by the
merchant banker .
Res tr ict ion on Business: -No merchant banker , other than a bank/publ ic
f inancial inst i tut ion (PFI) i s permi t ted to car ryon business
other than that just in the secur i t ies market wi th ef fect f rom
December 9, 1997.
However , a merchant banker who is regis tered wi th RBI
as a Pr imary Dealer /Satel l i te Dealer may car ry on such
business as may be permit ted by RBI wi th ef fect f rom
November 1999.
Maximum Number of Lead Managers : -The maximum number of lead manager i s re lated
to the s ize of the i ssue. For an i ssue of s ize less than Rs.50
crore, two managers are appointed. For s ize groups of Rs.50
crore to Rs.100 crore and Rs.100 corer to Rs.200 crore, the
maximum permissible lead managers are three and four
respect ively. A company can appoint f ive and f ive or more (as
approved by the SEBI) lead managers in case of i ssues between
Rs.200 corer and above Rs.400 crore respect ively.
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Responsib i l i t ies of Merchant Banker: -Every lead manager has to enter into an
agreement wi th the i ssuing companies set t ing out thei r mutual
r ights , l iabi l i t ies , and obl igat ion relat ing to i ssue and in
par t icular to disclosures , a l lotment and refund. A statement
speci fying these i s to be furnished to SEBI at least one month
before the opening of the i ssue for subscr ipt ion. In case of
more than one- lead manager /Merchant banker , the s tatement of
has to provide detai l s about thei r respect ive responsibi l i t ies . A
lead merchant banker cannot manage an i ssue i f the i ssuing
company is i t s associate . He can also not associate wi th a
merchant banker who does not hold a cer t i f icate of regis t rat ion
with the SEBI . I t i s necessary for a lead manager to accept a
minimum underwri t ing obl igat ion of 5% of the total
underwri t ing commitment or Rs.25 lakh whichever i s less . I f he
is unable to do so, he has to make ar rangements for an
underwri t ing of an, equal amount by a merchant banker
associated wi th that i ssue under int imat ion to SEBI .
Due Di l igence cer t if icate: -The lead manager i s responsible far the
ver i f icat ion of the content of a prospectus/ le t ter of of fer in
respect of an i ssue and the reasonableness of the views
expressed in them. He has to submit to the SEBI at least two
weeks before the opening of the i ssue far subscr ipt ion a due
di l igence cer t i f icate to the ef fect that
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a) The prospectus/ le t ter of af ter i s in conformity wi th thedocuments/mater ials and papers relevant to the i ssue,
b) All legal requirements connected wi th the i ssue havebeen ful ly compl ied wi th, and
c) The disclosure i s t rue, fa i r and adequate to enable theinvestors to make a wel l - informed decis ion as to the
investment in the proposed issue.
Submiss ion of Documents: -The lead managers(s) to an i ssue has (have) to .
Submit a t least two weeks before the date of f i l ing wi th the
regis t rar of companies/ regional s tock exchange or both
par t iculars of the i ssue, draf t prospectus/ le t ter of of fer , other
l i terature to be ci rculated to the investors/shareholders , and so
an to the SEBI . They have to ensure that the
modif icat ions/suggest ion made by i t wi th respect to the
informat ion to be given to the investors i s duly incorporated.
The draf t prospectus/draf t le t ter of of fer should be submit ted
to the SEBI along wi th the prescr ibed fee speci f ied below: -
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Issue s ize including
premium and intended
retent ion oversubscript ion
Fee per document
Up to Rs.5 crore Rs 10,000
Rs 5 crore- Rs 10 crore Rs 15,000
Rs 50 crore- Rs 50 corer Rs 25,000
Rs 10 crore- Rs 100 corer Rs 50,000
Rs 100 crore- Rs 500 corer Rs 2,50,000
More than Rs 500 corer Rs 5,00,000
They have to cont inue to be associated wi th the
issue t i l l the subscr ibers have received the share debentures
cer t i f icate or the refund of excess appl icat ion money.
Acquisi t ion of shares a merchant banker i s
prohibi ted f rom acquir ing secur i t ies of any company on the
basis of unpubl ished pr ice sensi t ive informat ion obtained
dur ing the course of any professional assignment ei ther f rom
the cl ient or otherwise. He has to submit to the SEBI the
complete par t iculars of any acquisi t ion of secur i t ies of a
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company whose i ssue i s being managed by him wi thin 15 days
f rom the date of the t ransact ion.
Disclosures to SEBI: -As and when required, a merchant banker has to
disclose to the SEBI:
I ) His responsibi l i t ies wi th regard to the managementof the i ssue,
I I) Any changes in the informat ion/par t icularspreviously furnished which have a bear ing and the
cer t i f icate of regis t rat ions granted to i t .
I I I ) The names of the companies whose i ssues he hasmanaged or has been associated wi th,
IV) The par t iculars relat ing to breach of capi taladequacy requirements and
V) Informat ion relat ing to his act ivi t ies as manager ,under wr i ter , consul tant or adviser to an i ssue.
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Qualities of a Good Merchant Banker
Merchant Bankers are individual s experts who
organize and manage the merchant banks . The operat ion of a
merchant bank is inf luenced by the personal i ty , t ra i t s of i t s
merchant bankers . Thei r qual i t ies are:
1) Leadership:-In order to interact wi th thei r c l ients and communicate
ef fect ively merchant bankers should possess al l re levant ski l l s
and update knowledge.
2) Aggressive act ion:-Merchant bankers always looking for new business
oppor tuni t ies . On locat ing a business opp or tuni ty and af ter
obtaining the assignment f rom the cl ients , a merchant banker
has to be prompt in grasping the c l ient s p roblems and to
provide a bet ter choice amongst a l ternat ive solut ions. A good
merchant banker i s one who do es not a l low his c l ients to think
anything outs ide except what has been advis ed and thus
holding the cl ients interest for the pres ent as wel l as for the
future.
3) Co-operat ion and Friendl iness: -Co-operat ion and f r iendl iness coupled wi th persuasiveness
must f low as natural t ra i t s in the merchant banker in order to
win over the t rust of thei r c l ients just l ike a doctor or a lawyer
who retains thei r c l ients permanent ly. A good merchant banker
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has to share the thoughts of his c l ients wi th sympathet ic
gestures and of fer suggest ions wi thout any greed or favo rs .
4) Contacts: -A merchant banking business mainly depends upon the sociable
nature and wider contacts . The scope of contact of a merchant
banker covers:
a . His own organizat ionb . Central and State Government Off ices (c) Banks,c . Financial Inst i tut ions,d . Promoters/Directors/Owners/Chief Execut ives of the
publ ic and pr ivate
e . enterpr ises ,f . (e) Pr inters ,g . ( f ) Adver t i s ing Agencies ,h . (g) Brokers and Stock Exchange Dealers ,i . (h) Advocates and Sol ici tors
Members of the press , e tc .
j . Merchant bankers have to widen the contacts andcont inue to maintain them by meet ing people in
personal , in special gather ings and through wr i t ing
to them.
5) Att i tude towards problem solving:-A good qual i ty of a merchant banker i s to be ski l led i n human
relat ions par t icular ly in the inter -person al behavior . A
merchant banker should have a posi t ive approach to understand
the di f f icul t ies , adverse ci rcumstances and the viewpoin ts of
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others . Effect ive communicat ion and proper feedback are the
pre- requis i tes for creat ing a posi t ive at t i tude towards problem
solving which could be gained par t ly through the learning
process and par t ly as an inborn personal i ty t ra i t .
6) Inquisi t iveness for acquiring new s ki l l s , informationand knowledge:-
Merchant bankers survive by providing the informat ion
required by thei r needy cl ients . Therefore they must keep
themselves updated wi th the la test informat ion in the area of
the service product which they market .
7) Knowledge: Thorough understanding of technical i ssues related to
business , understanding of legal and s tatutory requirements ,
appreciat ion of business acumen; f inancial ex per t i se i s a key
thing a merchant banker must know. Del ivery of his services
depends on his basic understanding of these i ssues.
8) Capital market famil iari ty: Merchant banker should be wel l versed wi th s tock markets ,
thei r movements . He should t rack imp happenings in the
market on ongoing basis .
9) Liasioning abi l i ty: Merchant bankers are required to l ia ison wi th SEBI , RBI , the
stock exchanges , deposi tor ies and other government
author i t ies for publ ic i ssue related dut ies . I t i s imperat ive
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that a merchant bank maintains excel lent rappor t wi th al l of
them and also close relat ions even at informal levels . This
only can see speedy and favorable clearances by the
author i t ies .
10) Innovat ion: Corporate may approach wi th unique requirements . Standard
solut ions and products may not solve problems somet imes.
Merchant bankers should do out of box thinking and b e able
to do f inancial engineer ing. They can device new f inancial
inst ruments and get approved f rom the author i t ies .
Innovat ion i s required even to address s t r ingent legal
requirements .
11) Integri ty: Merchant banker has valuable and conf ident ial informat ion
of i t s customers . Merchants bankers should take utmost care
that the informat ion i s not leaked and also not consumed for
the purpose other than for which i t was disclosed to the
merchant banker .
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SERVICES PROVIDED BY MERCHANT BANKS: ( in
detail)
The development act ivi ty through the country had exer ted
excess demand on the sources of funds by the ever expanding
indust ry and t rade which could not be met by the Al l India
Financial Inst i tut ions. In these ci rcumstances, the corporate
sector enterpr ises had the only al ternat ive to avai l themselves
of the capi tal market services for meet ing the long- term fund
requirements through capi tal i ssues of equi ty and debentures .
The growing demand for funds f rom capi tal market has
enthused many organizat ions to en ter into the f ie ld of merchant
banking for managing the publ ic i ssues.
The need of merchant banker i s a lso fel t in the wake of huge
untapped publ ic savings as merchant bankers can play a highly
signi f icant role in mobi l iz ing funds f rom savers to invest in
channels assur ing promising return on investments and thus
narrow down the gap between demand for and supply of
invest ible funds.
Merchant bankers not only provide advisory services to
corporate enterprises but also advise the investors of the
incent ives avai lable in the form of tax rel ief and other
statutory obl igat ions. Thus, the merchant bankers help
industry and trade to raise funds, and the investors to
invest their saved money in sound and healthy concerns with
conf idence, safety and expectat ion of higher yields.
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Broadly a merchant banker can provide the fol lowing
services:
1 . Corporate Counsel ing2. Project Counsel ing And Pre- Investment Studies3. Credi t Syndicat ion And Project Finance4. Issue Management5. Underwri t ing6. Bankers7. Por t fol io Management8. Venture Capi tal Financing9. Leasing10. Non-Resident Investment Counsel ing And
Management
11. Acceptance Credi t And Bi l l Discount ing12. Advising On Mergers , Amalgamat ions And
Take-Over
13. Arranging Offshore Finance14. Fixed Deposi t Broking15. Rel ief To Sick Indust r ies
Lets take a br ief look at each of these funct ions:
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Corporate Counseling
Corporate counsel ing denotes the advice provided by
the Merchant Banking to the corporate uni t to ensure bet ter
corporate per formance in terms of image bui lding among
investors , s teady growth through good working and
appreciat ion in market value of i t s equi ty shares . The scope
of corporate counsel ing, capi tal rest ructur ing and, por t fol io
management and the ful l range of f inancial engineer ing
includes venture capi tal , publ ic i ssue management , and loan
syndicat ion, working capi tal , f ixed deposi t , lease f inancing,
acceptance credi t , e tc . However counsel ing i s l imi ted to only
opinions and suggest ions and any detai led analysis would
form par t of a speci f ic service.
The scope of corporate counsel ing i s rest r ic ted to the
explanat ions of concepts , procedures and laws to be
observed by the cl ient company. Requirement of any act ion
to be taken or compl iance of s ta tutory formal i t ies to be made
for implementat ion of those suggest ions would mean the
demand for a speci f ic type of service other than corporate
counsel ing being of fered by the merchant bankers . An
academic analysis of corporate counsel ing present a
di f ferent picture than that t ranspi res f rom the l i terature of
the merchant bankers Fi rs t ly corporate counsel ing i s the
beginning of the merchant banking service which every
cl ients whether new or exis t ing has got to avai l a di f ferent
mat ter whether a merchant bank charges i t s c l ient separately
for render ing the corporate counsel ing service or includes
the element of fee in the other heads of services but f ro the
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angle of pr ior i ty . Corporate counsel ing i s f i r s t in l ine of the
services which a merchant banker of fers and than other
services .
Secondly the scope of the corporate counsel ing i s very
vast . I t s coverage ranges f rom the manager ial economies,
investments and f inancial management to Corporate Laws
and the related legal aspects of the organizat ional goals ,
locat ions factors , organizat ional s ize and operat ional scale ,
choice of product and market survey, forecast ing of product ,
cost reduct ion and cost analysis , a l locat ion of resources,
investment decis ions, capi tal management and expendi ture
control , pr icing methods and market ing s t rategy, e tc . As
f inancial and l i ivestment exper ts , a merchant banker has to
guide the corporate cl ients in areas cover ing f inancial
repor t ing, project measurements , working capi tal
management , f inancial requirements and the sources of
f inance, evaluat ing f inancial a l ternat ives , ra te of returns and
cost of capi tal besides basic corporate changes of f inancial
rear rangement , Reorganizat ion, mergers and acquisi t ions,
etc . are the areas to be covered.
Corporate laws should basical ly cover the legal aspects
including the var ious legal formal i t ies involved in areas of
corporate f inance being raised f rom the f inancial
inst i tut ions, banks and the general pubic in the form of loan,
new issues of equi ty or debentures respect ively
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Project Counseling
Project counsel ing services may be rendered
independent ly or maybe, i t re lates to project f inance and
broadly covers the s tudy of the project and o f fer ing advisory
assis tance on the project viabi l i ty and procedural s teps for
i t s implementat ion broadly including fol lowing aspects : -
general review of he project ideas / project prof i le , advice on
procedural aspects of project implementat ion, review of
technical feasibi l i ty of the project on the basis of the repor t
prepared by own exper ts r by the outs ide consul tants ,
select ing Technical consul tancy Organizat ion (TCO) for
prepar ing project repor ts and market surve y, or review of the
project repor ts or market survey repor t prepared by the TCO,
prepar ing project repor t form f inancial angle , and advice and
act on var ious procedural s teps including obtaining
government consents for implementat ion of projects . This
assis tance can include obtaining of the fol lowing
approvals / l icenses/permission/grants e tc form the govt .
agencies viz . le t ter of intent , indust r ia l l icense and DGTD
regist rat ion and government approval for foreign
col laborat ion.
In addi t ion to above, the faci l i ty providing guidance to
Indian ent repreneurs for making investment projects in India
and in Indian joint ventures overseas i s a lso covered under
this act ivi ty .
Besides the above services , project counsel ing may
include ident i f icat ion of potent ial investments avenues,
precise capi tal s t ructur ing shaping the pat tern of f inancing,
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arranging and negot iat ing foreign col laborat ions,
amalgamat ions, mergers and takeover , f inancial s tudy of the
project and preparat ion of viabi l i ty repor ts , to advice on the
f ramework of inst i tut ional guidel ines and laws governing
corporate f inance, assis tance in the preparat ion of project
prof i les and feasibi l i ty s tudies based on prel iminary project
ideas in order to indicate the potent ial . These repor ts would
cover the technical , f inancial and economic aspects of the
project f rom the point of view of thei r acceptance by the
f inancial inst i tut ions and banks; advis ing and assis t ing
cl ients in prepar ing the appl icat ions for obtaining le t ters of
intent , indust r ia l l icense and DGTD regis t rat ions etc ,
seeking approvals form the government of India for foreign
technical and f inancial col laborat ion agreements , guidance
on investment oppor tuni t ies for ent repreneurs coming to
India .Pre- investment s tudies are di rected mainly for the
prospect ive investor . These are the object ive and detai led
feasibi l i ty explanat ion of which the pr incipal a im is to arm
the cl ients wi th the sound foundat ion of facts and f igures to
evaluate the al ternat ive avenues open for cap i tal investments
form the pint of view of growth and prof i t prospects . Someof the cr i t ical i ssues that a s tudy of this genre deals wi l l
include an in-depth invest igat ion of environment and
regulatory factors , locat ion of raw mater ial , suppl ies ,
demand project ions and f inancial requirements . Such a s tudy
would assess the f inancial and economic viabi l i ty of a given
project and help the cl ients to ident i fy and shor t l i s t those
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projects that are bui l t upon his inherent s t rength son as to
accentuate corporate prof i tabi l i ty and growth in long run.
Gr ind lays bank has special izat ion in pre investment
studies and i t conducts such s tudies for foreign companies
whishing to par t ic ipate in joint ventures in India and of fers
a package of services including advice on the extent of
par t ic ipat ion, government regulatory factors and an
environmental scan of par t icular indust r ies in India
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Credit Syndication
Credi t syndicat ion also known as credi t procurement and
project f inance services . The main task involved in credi t
syndicat ion i s to raise to rupee and foreign currency loans wi th
the banks and f inancial inst i tut ions both in India and abroad. I t
a lso ar ranges the br idge f inance and the resources for cost
escalat ions or cost Overruns.
Broadly, the credi t syndicat ions include the fol lowing
act s ;
(a) Est imat ing the total costs(b) Drawing a f inancing plan for the total project cost -conforming to the requirements of the promoters and thei r
col laborators . Financial inst i tut ions and banks, government
agencies and underwri ters .
(c) Prepar ing loan appl icat ion for f inancial assis tance f romterm lenders/ f inancial inst i tut ions/banks and moni tor ing thei r
progress including the pre-sanct ion negot iat ions.
(d) Select ing the inst i tut ions and banks for par t ic ipat ion inf inancing.
(e) Fol low-up of the term loan appl icat ion wi th the f inancialinst i tut ions and banks and obtaining the sat i sfact ion for thei r
respect ive share of par t ic ipat ion.
( f) Arranging br idge f inance.(g) Assis t ing in complet ion of formal i t ies for drawl of termfinance sanct ioned by inst i tut ion expedi t ing legal
documentat ion formal i t ies drawing up inter -se agreements etc .
prescr ibed by the par t ic ipat ing f inancial inst i tut ions and
banks.
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(h) Assessing the working capi tal requi rements .Prepar ing the necessary appl icat ion for a successful i ssue
management the close l ia ison and coordinat ion wi th the var ious
const i tuents of the publ ic i ssue i s an essent ial condi t ion that
warrants ful l cooperat ion of a l l the par t ies af fect ing the cost
and prospects f the i ssue. Merchant banks, act ing as Manager
to the i ssue has to set t le the fee for Advocate/sol ic i tors
advice, accountants cer t i f icat ion, brokers and banks charges,
underwri ters commission, pr inters charges and advert i s ing
and publ ici ty expenses and coordinates wi th syndicated
merchant bankers and pr incipal brokers , s tock exchanges, e tc .
The responsibi l i ty for a l l this rests upon the merchant banker .
I f proper coordinat ion i s not done, the success of the i ssue may
be rendered unassured.
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Management OF Capital ISSUES:-
The capi tal i ssue are managed are category-1 merchant
banker and const i tutes the most impor tant aspects of thei r
services . The publ ic i ssue of corporate secur i t ies involves
market ing of capi tal i ssues of new and exis t ing companies ,
addi t ional i ssues of exis t ing companies including r ights
issue and di lut ion of shares by le t ter of of fer , . The publ ic
issues are managed by the involvement of var ious agencies
i .e . underwri ters , brokers , bankers , adver t i s ing agency,
pr inters , audi tors , legal advisers , regis t rar to the i ssue and
merchant bankers providing special ized services to make the
issue of the success . However merchant banker i s the agency
at the apex level than that plan, coordinate and control the
ent i re i ssue act ivi ty and di rect di f ferent agencies to
contr ibute to the successful market ing of secur i t ies . The
procedure of the managing a publ ic i ssue by a merchant
banker i s divided into two phases , viz;
(A) Pre- issue management(B) Post - i ssue management
(A) Pre-Issue Management:-
Steps required to be taken to manage pre- issue act ivi ty i s as
fol lows:-
(1) Obtaining s tock exchange approvals to memorandumand ar t ic les of associat ions.
(2) Taking act ion as per SEBI guide l ines
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(3) Final izing the appointments of the fol lowing agencies: Co-manager /Advisers to the i ssue Underwri ters to the i ssue Brokers to the i ssue Bankers to the i ssue and refund Banker Adver t i s ing agency Printers and Regist rar to the i ssue
(4)
Advise the company to appoint audi tors , legal advisersand broad base Board of Directors
(5) Draf t ing of prospectus(6) Obtaining approvals of draf t prospectus f rom the
companys legal advisers , underwri t ing f inancial
inst i tut ions/Banks
(7)
Obtaining consent f rom par t ies and agencies act ing forthe i ssue to be enclosed wi th the prospectus .
(8) Approval of prospectus f rom Secur i t ies and ExchangeBoard of India .
(9) Fi l ing of the prospectus wi th Regist rar of Companies .(10) Making an appl icat ion for enl is tment wi th Stock
Exchange along, wi th copy of the prospectus .(11) Publ ici ty of the i ssue wi th adver t i sement and
conferences.
(12) Open subscr ipt ion l i s t .
(B) Post- issue Management:-Steps involved in post - i ssue management are: -
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(1) To ver i fy and conf i rm that the i ssue i s subscr ibed tothe extent of 90% including devolvement f rom
underwri ters in case of under subscr ipt ion
(2) To supervise and co-ordinate the al lotment procedureof regis t rar to the i ssue as per prescr ibed Stock
Exchange guidel ines
(3) To ensure i ssue of refund order , a l lotment le t ters / cer t i f icates wi thin the prescr ibed t ime l imi t of10
weeks af ter the closure of subscr ipt ion l i s t
(4) To repor t per iodical ly to SEBI about the progress inthe mat ters related to al lotment and refunds
(5) To ensure he l i s t ing of secur i t ies a t Stock Exchanges.(6) To at tend the investors gr ievances regarding the
publ ic i ssue
The Merchant Bankers for managing publ ic i ssue can
negot iate a fee subject to a cei l ing. This fee i s to be shared
by al l lead managers , advisers e tc .
0 .5% of the amount of publ ic i ssues up to Rs.25 crores 0 .2%
of the amount exceeding Rs.25crores , i f more than one
Merchant bankers are managing the i ssue.
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Under writ ing of publ ic issue
A ful ly underwri t ten publ ic i ssue spel l s conf idence to the
invest ing publ ic , which ensures a good response to the i ssue.
Keeping this in view companies , which f loat a publ ic i ssue
usual ly , desi re a ful l underwri t ing of the i ssue.
Underwri t ing i s only the guarantee given by the underwri ter
that in the event of under subscr ipt ion, the amount
underwri t ten would be subscr ibed in propor t ion by the
underwri ter . An underwri ter of the i ssue gets the fol lowing
benef i t s :
I t earns a commission of the commitment given . I t earns the r ight to be appointed as bankers of that i ssue. I t expands i t s c l ientele by underwri t ing more and moreissues.
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Bankers to the Issue
The merchant banker can automat ical ly become the banker to
the i ssue in the fol lowing cases:
The bank is a broker to the company I t has given underwri t ing commitments . I t acts as a manger to the i ssue The funct ion of a banker to the i ssue i s to acceptappl icat ion forms f rom the publ ic together wi th subscr ipt ion
money and t ransfer them to the account of the control l ing
branch.
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Portfolio Management
Por t fol io refers to investment in di f ferent types of marketable
secur i t ies or investment papers l ike shared, debentures and
debenture s tocks, bonds etc . f rom di f ferent companies or
inst i tut ions held by individuals f i rm or corporate uni ts .
Por t fol io management refers to managing ef f ic ient ly the
investment in the secur i t ies held by professionals to others .
Merchant bankers take up management of a por t fol io of
secur i t ies on behal f of thei r c l ients , providing special services
wi th a view to ensure maximum return by such investments
wi th a minimum r isk of loss o f return on the money invested in
secur i t ies .
A merchant banker whi le per forming the services of por t fol io
management has to enquire of the investment needs of the
cl ient , the tax bracket , abi l i ty to bare r i sk, l iquidi ty
requirements , e tc . they should s tudy the economic environment
af fect ing the capi tal market , s tudy the secur i t ies market and
ident i fy blue chip companies in which money can be invested.
They should keep record of la test amendment in government
guidel ines , s tock exchange regulat ions, RBI regulat ions, e tc .
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Advisory Services Relating To Mergers and Takeovers
A merger i s def ined as a combinat ion of two or more
companies into a s ingle company where one services and other
looses thei r corporate exis tence. A merger i s a lso def ied as an
amalgamat ion wherein the shareholders of the combining
companies become substant ial ly the shareholders of the
company formed.
A takeover i s refer red to as an acquisi t ion, which i s the
purchase, by one company of a control l ing interest in the share
capi tal of another exis t ing company.
Merchant bankers are the middlemen set t l ing negot iat ions
between the of fered and the of feror . Thei r role i s speci f ic and
special ized in handl ing the mergers and taker over
assignments . Being a professional exper t , the merchant banker
is apt to safeguard the interest of the shareholders in both the
companies and as such his assis tance i s useful for both the
companies , i .e . the acquirer as wel l as the acquired company.
Based on the purpose of business object ive, the search of the
acquirer company wi l l s tar t for a merger par tner company. I f
the object ive of merger i s growth or iented i .e . seeking
expansion in product ion and market segments , ut i l izat ion of
exis t ing companies or opt imum ut i l izat ion of resources, then
the acquirer company wi l l select a business related company as
a merger par tner .
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I f the object ive i s diversi f icat ion in product ion l ine or business
act ivi t ies , then i t wi l l select a non-related company as a merger
par tner .
Once the merger par tner i s proposed the merchant banker has to
appraise the merger / takeover proposal wi th respect to f inancial
viabi l i ty and technical feasibi l i ty . He has to negot iate wi th the
par t ies and decide the purchase considerat ion and mode of
payment . He has to co mply wi th the leg al formal i t ies l ike
get t ing approval f rom the Government / RBI; draf t ing the
scheme of amalgamat ion; get t ing approval of company Board,
f inancial inst i tut ion, high cour t i f requi red; ar ranging for the
meet ing etc .
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Venture Capital Financing
Financing an emerging high-r isk project i s cal led venture
capi tal f inancing. Many merchant bankers are enter ing into this
area by also f inancing viable upcoming projects . The f inancing
is by subscr ipt ion to the equi ty capi tal , whi le repayment i s by
sel l ing the equi ty through s tock market when the shares are
l i s ted.
Leasing
Is there another lucrat ive area of f inancing where merchant
bankers are turning? Leasing i s a viable source of f inancing
whi le acquir ing capi tal assets . The services include
arrangement for lease f inance faci l i t ies for leasing companies ,
legal ; documents and tax consul tancy.
Non Resident Investment
To at t ract NRI investments in the pr imary and secondary
markets , the merchant bankers provide investment advisory
services to the NRIs in terms of ident i f icat ion of investment
oppor tuni t ies , select ion of secur i t ies , por t fol io management ,
etc . they also take care of operat ional detai l s l ike purchase and
sale of secur i t ies secur ing the necessary clearance f rom RBI
under FERA for repat r ia t ion of dividends and interest , e tc .
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Acceptance Credit and Bil l Discounting
Though merchant bankers wor ld over special ize in acceptance
credi t and bi l l discount ing, these services are not current ly
provided by merchant bankers in India the pr incipal reasoning
being the lack of an act ive market for commercial bi l l s .
Arranging Offshore Finance
The merchant bankers also help thei r c l ients in the fol lowing
areas involving foreign currency f inancing:
1 . Financing Of Expor ts And Impor ts2 . Long Term Foreign Currency Loans3 . Joint Ventures Abroad4. Foreign Col laborat ion ArrangementsThe assis tance rendered as in the case of f inancial services
covers appraisals , negot iat ions, compl iance wi th proceduraland legal aspects e tc .
Management of Fixed Deposits of Companies
Recent ly , merchant s bankers have begun to s t ructure and
mobi l ize f ixed deposi t s for thei r corporate cl ients . They take
care of the procedural and legal aspects , and also mange thecol lect ion and subsequent servicing of the deposi t s . Advice
wi th regard to the amount to be raised, interest charges, terms
of deposi t s and other related i ssues are also of fered to the
cl ient .
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Relief to Sick Industries
The services of fered by merchant bankers to s ick industries
can be summarized as fol lows :
1 . Assessment of capi tal requi rements and counsel ing oncapi tal rest ructur ing;
2 . Appraisal of technological , envi ronmental , f inancial andother factors causing s ickness;
3 . Preparat ions of programs and packages for rehabi l i ta t ionof s ick uni ts ;
4 . Providing necessary assis tance where the rehabi l i ta t ionpackage involves mergers or amalgamat ion;
5 . Obtaining necessary approval for implementat ion therehabi l i ta t ion package f rom the s tatutory author i t ies ;
6 . Monitor ing the implementat ion of the scheme of rehabi l i ta t ion.
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REGULATORY AUTHORITY
Guidelines of SEBI
After the obl igat ions of the CCI , the place was occupied by a
legal organ cal led as Securi t ies and Exchange Board of India.
The issue of capi tal and pr icing of i ssues by companies has
become f ree of pr ior approval . The SEBI has i ssued guidel ines
for the i ssue of capi tal by the companies . The guidel ines
broadly covers the requirement of the f i r s t i ssue by a new or
the f i r s t i ssue of a new company set up by the exis t ing
company, the f i r s t i ssue by the exis t ing pr ivate companies and
publ ic i ssues by the exis t ing l i s t ing companies . The SEBI i s
the most powerful organizat ion to control and lead both the
pr imary market and secondary market .
The SEBI has announced the new guidel ines for the
disclosures by the Companies leading to the investor
protect ion. They are presented below:
a) If any Companys other income exceeds 10 per cent of thetotal income, the detai l s should be disclosed.
b) The Company should disclose any adverse s i tuat ion whichaffects the operat ions of the Company and occurs wi thin one
year pr ior to the date f i l ing of the of fer document wi th the
Regist rar of Companies or Stock Exchange.
c) The Company should also disclose the informat ionregarding the capaci ty ut i l izat ion of the plant for the las t 3
years .
d) The Promoters of the Company must maintain thei rholding at least a t 20 per cent of the expanded capi tal .
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e) The minimum appl icat ion money payable should not beless than 25 per cent of the i ss ue pr ice.
f ) The company should disclose the t ime normal ly taken forthe disposal of var ious types of investors gr ievances.
g ) The Company can make f i rm al lotments in publ ic i ss ues asfol lows:
Indian mutual funds (20%), FIIS (24%), Regular employees of the company (10%), Financial inst i tut ion (20%).
h) The Company should disclose the safety net scheme orbuy back ar rangements of the shares proposed in publ ic i ssue.
This scheme is appl icable to a l imi ted number of 500 shares
per al lot tee and the of fer should be val id for a per iod of a t
least 6 months f rom the date of dispatch of secur i t ies .
i ) According to the guidel ines , in case of the publ ic i ssues,at least 30 mandatory col lect ion cent res should be es tabl ished.
j ) According to the SEBI guidel ines regarding r ights i ssue,the Company should give adver t i sements in not less than two
news-papers about the dispatch of le t ters of of fer . No
preferent ial a l lotment may be made along wi th any r ights i ssue.
k) The Company should also disclose about the fee agreedbetween the lead managers and the Company in the
memorandum of understanding.
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About AMBI:
In the ear ly 1990s, the merchant banking indust ry in India
wi tnessed a phenomenal growth wi th over 1 ,500 merchant
bankers regis tered wi th SEBI . In order to ensure the wel l being
of the indust ry and for promot ing heal thy business pract ices , i t
became necessary to set up a Sel f Regulatory Organizat ion
within the indust ry. This led to the bi r th of the Associat ion of
Merchant Bankers of India (AMBI) . I t was promoted to
exercise overal l supervis ion over i t s members in the mat ters of
compl iance wi th s tatutory rules and regulat ions per taining to
merchant banking and other act ivi t ies .
AMBI was granted recogni t ion by SEBI to set up professional
s tandards, for providing ef f ic ient services and to establ ish
standard pract ices in merchant banking and f inancial services .
AMBI, in consul tat ion wi th SEBI , i s working towards
improving the compl iance of s ta tutory requirement in a
systemat ic manner . AMBI 's pr imary object ive i s to ensure that
i t s members render services to al l i t s const i tuents wi thin an
agreed f ramework of e thical pr inciples and pract ices . I t a l so
works as a t rade body promot ing the interests of the indust ryand of i t s members .
The spect rum of AMBI 's act ivi t ies i s wide. I t i s the nodal point
for the assimi lat ion and disseminat ion of informat ion relat ing
to the merchant banking indust ry. Thus AMBI ensures that i t s
members are aware of the la test rules/guidel ines i ssued byvar ious s tatutory author i t ies , as a lso other mat ters of interest .
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AMBI is the merchant banking indust ry 's sole representat ive to
al l s ta tutory author i t ies , in par t icular , SEBI . The Chairman of
AMBI is on the Pr imary Market Advisory Commit tee of SEBI .
To ensure heal thy compet i t ion wi thin the indust ry, AMBI has
publ ished i t s Code of Conduct for Merchant Bankers . This
document sets out the broad parameters and the spi r i t in which
the members of AMBI should conduct business . AMBI has also
produced a Due Di l igence Handbook, which has proved to be a
useful tool for merchant bankers . This handbook is cur rent ly
under revis ion. For the benef i t of investors , AMBI has brought
out an Investor ' s Educat ion Handbook
Concurrent wi th the act ivi ty of educat ing investors , AMBI
regular ly conducts /sponsors ta lks and seminars on f inancial
mat ters . AMBI regular ly submits a Pre-Budget Memorandum tothe Finance Minis t ry. This memorandum expresses the concerns
of the indust ry and requests speci f ic changes in var ious
f inancial legis lat ions that would help bet ter the range of
services and oppor tuni t ies provided by the indust ry.
AMBI is a lso the int ra- indust ry arbi t rator on al l mat ters ar i s ingbetween i t s members .
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EXAMPLE:-
STATE BANK OF INDIA
SBIs Merchant Banking Group is s t rongly posi t ioned to of fer
perfect f inancial solut ions to your business . They special ize in
the ar rangement of var ious forms of Foreign Currency Credi ts
for Corporate .
They provide the resources, convenience and services to meet
your needs by ar ranging Foreign Currency credi ts through:
Commercial loans
Syndicated loans
Lines of Credi t f rom Foreign Banks and Financial Inst i tut ions
FCNR loans
Loans f rom Expor t Credi t Agencies
Financing of Impor ts .
They are internat ional ly the most Prefer red Bank by Expor t
Credi t Agencies for Guarantees in case of the Indian Cl ients or
Projects .
SBI being an Indian ent i ty has no India exposure cei l ing. Thei r
Primary focus i s On Indian Cl ients . SBIs seasoned Team of
professionals provides you wi th Insight ful credi t Informat ion
and helps you Maximize the Value f rom the t ransact ion.
http://images.google.co.in/imgres?imgurl=http://im.in.com/connect/images/profile/aug2009/State_Bank_of_India_300.jpg&imgrefurl=http://connect.in.com/state-bank-of-india/profile-538742.html&usg=__IElLNaKCz2ZkFXl4mhMScWt82Lw=&h=360&w=300&sz=19&hl=en&start=38&tbnid=EEAP50y_Z181RM:&tbnh=121&tbnw=101&prev=/images?q=state+bank+of+india+logo&gbv=2&ndsp=20&hl=en&sa=X&start=20 -
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PRODUCTS AND SERVICES
1] Arranging External Commercial Borrowings (ECB)
2] Arranging and par t ic ipat ing in internat ional loan syndicat ion
3] Loans backed by Expo r t Credi t Agencies
4] Foreign currency loans under the FCNR (B) scheme
5] Impor t Finance for Indian corporates .
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Organizational setup of merchant bankers in India
In India a common organizat ional setup of merchant bankers to
operate i s in the form of divis ions of Indian and foreign banks
and f inancial inst i tut ions, subsidiary companies establ ished by
bankers l ike SBI , Canara Bank, Punjab Nat ional Bank, Bank of
India , e tc . Some f i rms are also organized by f inancial and
technical consul tants and professionals . Secur i t ies and
Exchange Board of India has divided the merchant bankers into
four categor ies based on thei r capi tal adequacy. Each category
is author ized to per form cer tain funct ions. From the point of
organizat ional setup Indias merchant banking organizat ions
can be categor ized into four groups on the basis of thei r
l inkage wi th parent act ivi ty . They are:
(A) Inst i tut ional Base
Where merchant banks funct ion as an independent wing or as
subsidiary of var ious pr ivate/Central Governments/State
Governments f inancial inst i tut ions. Most of the f inancial
inst i tut ions in India are in publ ic sector and therefore such
setup plays a role on the l ines of government pr ior i t ies and
pol icies .
(B) Banker Base
These merchant bankers funct ion as divis ion/subsidiary of
banking organizat ion. The parent banks are ei ther nat ional ized
commercial bank or the foreign banks operat ing in India . These
organizat ions have brought
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professional ism in merchant banking sector and they help thei r
parent organizat ion to make a presence in capi tal market .
(C) Broker Base
In the recent past there has been an inf low of qual i f ied and
professional ly ski l led brokers in var ious s tock exchanges of
India . These brokers under take merchant banking related
operat ions also l ike providing investment and por t fol io
management services .
(D) Private Base
These merchant banking f i rms are or iginated in pr ivate sector .
These organizat ions are the outcome of oppo r tuni t ies and scope
in merchant banking business and they are providing ski l l -
or iented special ized services to thei r c l ients . Some foreign
merchant bankers are also enter ing ei ther independent ly or
through some col laborat ion wi th thei r Indian counterpar ts .
Pr ivate sector merchant banking f i rms have come up ei ther as
the sole propr ietorship or publ ic l imi ted companies . Many of
these f i rms were in exis tence for qui te some t imes before they
added a new act ivi ty in the form of merchant banking services
by opening new divis ions on the l ines of commercial banks and
All India Financial Inst i tut ions.
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Development stages of Merchant Banking firms
In the merchant banking organizat ion in the
fol lowing char t , the f i rm of merchant banker and individual
s tock broker have been included as they have been contr ibut ing
join t ly to the growth of the profess ion of merchant banking .
But most of these f i rms are not wel l developed to show stage of
matur i ty . Most of them are s t i l l in the s tar t -up and ear ly
growth s tages. This i s easi ly dissemble f rom the fol lowing
project ion of the development s tages
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Un it
S ta g es in
d ev e lo p men t o f
merch a n t b a n k in g
Org a n iza t io n a l
se tu p
Prin c ip a l
f in a n c in g so u rce
1 S ta rt -u p
Very lo o se
o rg a n iza t io n ,
fo u n d ers a n d
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in th e ma n a g emen t
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Emerg in g fo rma l
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ma n a g emen t
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in v es tmen t
3Acce lera t in g
g ro wth
Fo rma l
o rg a n iza t io n w i th
p ro fess io n a l ,
ma n a g er o r fo u n d er
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wi th b a n k s
b a ck in g in terms
o f lo a n
4 S u sta in in g g ro wth
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o rg a n iza t io n w i th
p ro fess io n a l
ma n a g er
Co rp o ra te f in a n ce
fro m b a n k p lu s
eq u i ty fu n d s fro m
p u b l ic
5 ma tu r i ty
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ma n a g emen t
o rg a n iza t io n
Ma tch in g f in a n ce
a v a i la b le f ro m a l l
p o ss ib le so u rces
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Level of Competition
The rapid growth in the pr imary capi tal market has led
to an even greater prol i ferat ion of Merchant Bankers . The
number of Merchant Bankers has increased f rom only 33 in the
year 1989-90 to 405 in 1993-94. Present ly , the number of
Merchant Bankers in di f ferent categor ies regis tered wi th SEBI
is 501 (August 1994) . Consider ing a total number of publ ic
issues in the year 1994-95, a Merchant Banker on average
viedlor 3 .5 i ssues. Therefore a tough compet i t ion exis ts in the
l ine of f i ssue management . The high level of compet i t ion in
Merchant Banking business especial ly i ssue management i s
evident f rom the fact that out of 140 Category-I merchant
Bankers in 1992-93 only 66 were able to manage an i ssue.
Merchant Banking business i s handled by a few
establ ished players and for the others there i s a heavy
compet i t ion. Therefore, thei r survival dependent on innovat ive
capi tal i ssue s t ructur ing and other income generat ing act ivi t ies
l ike leasing, high-purchase, investments and deal ings in
secondary market operat ions.
As a resul t of l iberal izat ion and global izat ion,
compet i t ion in corporate sector i s becoming intense. For thei r
survival and growth, companies are reviewing thei r s t rategies ,
s t ructures and funct ioning. This had led to corporate
rest ructur ing including mergers , acquisi t ions, spl i t s ,
divestments and f inancial rest ructur ing. This area of corporate
advisory services which i s largely in the hands of pr ivate
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consul tancy f i rms, a lso of fers good oppor tuni ty to Merchant
Bankers to extend the area of operat ions.
CURRENT AFFAIRS
RBI allows cash withdrawal from merchant banker terminalsBesides ATMs, customers can now also withdraw cash up to Rs1000 from
terminals at different merchant establishments, the Reserve Bank. As a further
step towards enhancing the customer convenience in using the plastic money, it
has been decided to permit cash withdrawals at POS (point of sale) terminals.
To start with, this facility will be available for all debit cards issued in India, up
to Rs1000 per day," RBI said in a statement issued here.
The use of debit cards at POS terminals at different merchant establishments has
been steadily increasing, it said. This facility is available only against debit
cards issued in India.
At present cash withdrawal facility using plastic cards is available only at
Automatic Teller Machines (ATMs) with the number of ATMs in the country at
44,857. There are 4,70,237 POS terminals in the country.
This facility may be made available at any merchant establishment designated
by the bank and would be available whether the card holder makes a purchase
or not.
Morgan Stanley makes i-banking comebackThe joint venture between JM Financial and Morgan Stanley was inked in 1997
and formalized in 1999. The JV had investment banking operations other than
equity broking, research, wealth management and advisory and securities
distribution operations. Post the split, JM Financial acquired the investment
banking company together with its subsidiaries, which were engaged in fixed
income, equity broking, wealth management, advisory and distribution
businesses of $ 20 million. The Indian partner sold its 49% holding in JM
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Morgan Stanley Securities (JMSPL), the institutional equity broking company
to Morgan Stanley for $ 445 million.
Bulge bracket investment banking major, Morgan Stanley has re-entered
investment banking business on its own, after parting ways with JM Financial
its former Indian partner.
PNB aims profit of 7,500crore by 2013The country's second largest public sector lender Punjab National Bankaims to
double its profit to Rs7,500 crore in the next four years.
"The bank has set a target to expand total business to Rs10crore and earn net
profit of Rs7,500 crore by 2013," said PNB Chairman and Managing Director K
C Chakrabarty, who is charge of Deputy Governor of RBI.
The growth driver would be better asset liability management, thrust on
recovery, focus on customers and financial inclusion, he had said. Besides, the
bank plans to open new line of businesses in the current fiscal including
merchant banking subsidiary.PNB Investment Services aims to provide investment consultancy and merchant
banking services and would be operational in the next three months. Currently,
these operations are run by a division of the bank.
ICICI Bank to oversee mergers and acquisitionsICICI bank and its merchant banking arm, ICICI Securities (I-Sec), haveentered into an agreement, whereby all M&A deals will be done out of ICICI
Bank. The agreement goes on to define an M&A deal as one which involves
change in management control.
This arrangement replaces the earlier practice of both I-Sec and ICICI Bank
working together on M&A deals. Since a predominant number of people, who
wish to be advised on M&A, also look for acquisition finance, it was decided
http://economictimes.indiatimes.com/News/News-By-Industry/Banking/Finance-/Banking/PNB-aims-profit-of-7500-cr-by-2013/articleshow/4654620.cmshttp://economictimes.indiatimes.com/News/News-By-Industry/Banking/Finance-/Banking/PNB-aims-profit-of-7500-cr-by-2013/articleshow/4654620.cms -
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that the business should be housed in the bank, I-Sec MD Madhabi Puri Buch
told ET. Now, if a corporate is seeking a sell mandate or a buy mandate, where
the transfer of controlling interest takes place, the deal will be done by ICICI
Bank.
ICICI Bank had initially entered the investment banking space in 2006. Over the
past couple of years, both the bank and its subsidiary have been vying for deals.
The new deal has taken into effect between both the entities from April 1.
Birla Capital and Financial Services gets SEBI merchant bankinglicense
Birla Capital & Financial Services Ltd has been granted a merchant-banking
license by the Securities and Exchange Board of India. The license will enable
the company to offer a wide range of on-shore investment banking advisory and
underwriting services in the Indian market.
The company, which is a part of the Yash Birla conglomerate, will initially
concentrate on regulated services like initial public offerings, takeover,
buybacks, delisting and valuations. It also offers non-regulated services like PE
Syndication, M&A Advisory and other corporate advisory.
Birla Capital & Financial Services Ltd. is part of the 3,000-crore Yash BirlaGroup that has diversified interest in sectors like auto & engineering, textiles &
chemicals and power & electrical, education & IT.
Primary market slowdown, affects merchant bankers walletThe recent slowdown in the primary market has impacted not only investors but
merchant bankers as well, as there has been a significant decline of nearly 60
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per cent in their percentage fees so far this year.
"There is a clear drop in the merchant banking fees to Rs 216crore in
comparison to Rs. 771crore for the calendar year 2007, indicating a drop of 57.9
per cent on annualized basis," Nexgen Capitals, the merchant-banking arm of
brokerage firm SMC Global Securities.
Merchant bankers are those who advise the issuer about the public offer and
manage the issue.
The average percentage fees has declined to 1.21 per cent so far this year from
2.24 per cent in 2007, the report added.
Reliance Power IPO of Rs 11,563 crore during this year with the merchant
banking fee of Rs 50.6 crore, amounting to 0.44 per cent of the issue size had a