Merchant Banking and Financial

Services
Subject code: BA5011

Prepared by:
S. Srinisha
AP –M.B.A
M.A.M B-SCHOOL.
 MERCHANT BANKING AND
FINANCIAL SERVICES
UNIT I - MERCHANT BANKING
-Introduction
– An Overview of Indian Financial System
– Merchant Banking in India
–Recent Developments and Challenges ahead
– Institutional structure
– Functions of Merchant Banking
– Legal and Regulatory Frameworks
– Relevant Provisions of Companies Act
-SERA-SEBI guidelines
-FEMA etc.
-– Relation with stock Exchanges , OTCEI and NES.
Objectives of a Financial system:
1. Accelerating the growth of economic development.
2. Encouraging rapid industrialization
3. Acting as an agent to various economic factors such as
industry, agricultural sector, government etc.
4. Accelerating rural development
5. Providing necessary financial support to industry
6. Financing housing and small scale industries
7. Development of backward areas, infrastructure and livelihood
8. Imposing price control in need
9. Protecting environment
INTRODUCTION TO FINANCIAL SYSTEM IN INDIA:
I. PRE INDEPENDENCE SITUATIONS
 During the 274 year regime of the East India Company
(1600-1874) the financial system of the country was not at all
organized.
 It was monopolized by the mercantile houses who were
involved in banking business by providing loans, receiving
deposits and issuing currency. They are commonly known as
‘agency houses’.
 The formal banking business was developed by establishment
of three Presidency Banks, namely
1. The Bank of Bengal (1806)
2. Bank of Bombay (1840)
3. The Bank of Madras (1846).
II. POST INDEPENDENCE ERA (1950-1991)
The different landmarks during this phase were
• Bank nationalization in 1969
• Establishment of various financial institutions.
• Imposing overall control on insurance sector by the Government.
• Establishment of large scale industrial units.
• Emphasizing the growth of small scale industries by helping them through
subsidized funding and direct investment.
• Imposition of regulatory measures
• Inserting Government intervention in business
• Amending the companies Act, Securities Contracts (Regulation) Act, 1956,
Monopolies and Restrictive Trade practices Act 1970, Foreign Exchange
Regulation Act 1973 etc.,
III. ERA AFTER LIBERALISATION

• The announcement of the New Economic Policy in 1991.

• The reformation process has been started.
• Liberalization and globalization of Indian economy, deregulation of
Government Control.
• Privatization of industries.
• Emergence of new generation financial institutions.
• Introduction of computerized business environment.
• The regulatory framework has been duly changed.
• Indian financial sector is gradually moving towards attainment of global
standards.
STRUCTURE OF INDIAN FINANCIAL SYSTEM:
• Financial system is a system of arranging different types of funds required for the
business. It deals about
(a) Financial Institutions
(b) Financial Markets
I. Capital market ( Primary Market & Secondary Market)
II. Money market ( Organized & Unorganized )
III. Foreign exchange market
IV. Government securities market (Treasury Bills & Bonds)
Treasury Bills - bills issued for meeting the short term revenue expenditure of the
Government.
Bonds are issued for raising Long term loans which are repayable over a period of 15 to
20 years.
(c) Financial Instruments
(d) Financial Services
MERCHANT BANKING-DEFINITION:
• “A merchant banker has been defined as any person who is engaged in the
business of issue management either by making arrangements regarding selling,
buying or subscribing to securities or acting as manager, consultant, adviser or
rendering corporate advisory services in relation to such issue management”.
-Securities and Exchange Board of India (Merchant
Bankers) Rules, 1992
Objectives of merchant Bank:
• Channelizing the financial surplus of the general public
• Co-coordinating the activities of various intermediaries like the registrar,
bankers, advertising agency, printers, underwriters, brokers, etc., to the share
issue
• Ensuring the compliance with rules and regulations governing the securities
market.
Merchant Banking In India

• The first merchant bank was set up in 1969 by Grind lays Bank.
• Working capital management;
• Syndication of project finance,
• Global loans, mergers, capital restructuring, etc.,
• Initially the merchant banker in India was in the form of management of public
issue and providing financial consultancy for foreign banks.
• In 1973, SBI started the merchant banking and it was followed by ICICI.
• SBI capital market was set up in August 1986 as a full fledged merchant
banker.
• Between 1974 and 1985, the merchant banker has promoted lot of companies.
However they were brought under the control of SEBI in 1992.
Functions of Merchant Bank:
• Corporate Counseling
• Project Counseling
• Capita l Structuring
• Portfolio Management
• Issue Management
• Credit Syndication
• Working capital
• Venture Capital
• Lease Finance
• Fixed Deposits
Classification Of Merchant Bankers By SEBI
1. Issue management
2. Underwriters
3. Consultants to Issue
4. Mobilization of foreign funds for companies
Recent Developments in Merchant Banking and Challenges Ahead:

The recent developments in Merchant banking are due to certain contributory

factors in India. They are

1. 1985-1992 - many new issues.

2. The foreign investors – both portfolio investment and foreign direct
investments
3. Disinvestment in the government sector.
4. New financial instruments are introduced in the market time and again.
5. Mergers and corporate restructuring along with MOU and MOA
Challenges faced by merchant bankers in India

1. SEBI guideline has restricted their operations to Issue Management and

Portfolio Management to some extent.
2. Clients are often blamed on to the merchant banks, so they are into
trouble without any fault of their own.
3. The net worth requirement is very high in categories I and II specially,
4. Poor New issues market in India is drying up the business of the merchant
bankers.
• Granting and issuing of letter of credit, traveler's
cheques and circular notes.
• Buying and selling foreign exchange including
bank notes, bullion and specie.
• Acquiring, holding, issuing on commission,
underwriting, and dealings in stocks, funds, shares,
debentures, bonds, obligations, securities and
investments of all kinds.
• Purchasing and selling securities on behalf of
constituents or others, the negotiating of loans and
advances.
• Safe custody of all kind.
 NBFCS OFFERING MERCHANT BANKING
• Mobilisation Of Savings
• Provision Of Easy, simple, AND Adequate credit
• Acting as financial supermarket
• Channelising funds for productive purposes
• Increasing savings in public
• Providing housing finance
• Increasing the standard of living
• Promoting economic development
• Rendering investment advice
 Functions of banks
• Mobilizations of savings
• Facilitate commerce and trade
• Balanced regional development
• Provision of finance to backward communities and
neglected segments of society – commercial and
cooperative bank on concessional rate.
• Development of agriculture and priority sectors in the
economy – agriculture, small scale industries
(SSIs),retail trade, small borrowers, self-employed
persons, etc.., and also exports .
 Structure of Banking System in India
RESERVE BANK OF INDIA
1. Scheduled Banks 2. Non - Scheduled

a)Co-operative Banks:
• Primary Co-operative Banks
• Central Co-operative Banks
• State Co-operative Banks
• Long-term Co-operative Banks
• Urban Co-operative Banks
b) Commercial Banks
• Foreign Banks
• Indian bank : a. Private sector bank
b. Public sector bank : SBI and its associated banks, other
Nationalized banks , Regional Rural banks.
 TYPES OF BANKS
SCHEDULED BANK : It is one which is registered in the
second schedule of th RBI.
• The following Conditions must be fulfilled by a scheduled
bank for inclusion in the schedule: Business of Banking in
India, defined in sec3 companies act,1956,or company
incorporated or under any law in force in any place outside
India or an institution notified by the Central Government
in this behalf.
• It must have paid-up capital and reserve of not less than 5
lakhs.
• It must satisfy RBI.
Non-SCHEDULED BANK :Banks were not included in schedule
of the RBI. It is also comes under the ambit of the RBI control.
The Scheduled banks may be two types 1. commercial banks and
co-operative banks.
commercial banks are those banks which perform all kinds of
functions.
1. Based on ownership three types:
• Public sector banks : SBI, nationalized banks, Regional
Rural banks in those which the government has a major
holding.
• Private banks : those banks in which stake are hold by
private individuals and not by government.
• Those banks foreign in origin and which has their head office
located outside India. These bank were known as exchange
bank earlier. eg: standard charted bank in 1858 and citibank
in 1902.
2.Based on functions may be two types
1.Primary functions: Acceptance of current & fixed ,
savings deposits, advancing loans like Overdraft , cash
credit, Discounting bills of exchange, Money at call, Term
loans , Consumer credit, Miscellaneous advances.
Creation of credit like promoting the uses of cheques,
financial internal and foreign trade, Remittance of funds.
2. Secondary function: Agency Services like collection and
payment of credit instruments, collection of shares and
dividends purchases and sales of securities, Acts as
consultancy , Trustees and Executor , Income tax
consultancy. General utility services like merchant banking,
underwriting etc., Fulfilment of socio-Economic objectives
• Co-operative banks came into existence with the enactment of the Co-
operative credit societies Act of 1904 which provided fort he formation of
Co-operative Credit Societies.
FEATURES :
• Organized and managed on the principles of co- operation, self help and
mutual help and function on ‘one member ,one vote”.
• No profit no loss basis.
• It perform main banking function and range of offer is narrow compare to
commercial bank.
• It is in agricultural and rural sector mainly.
• They are perhaps the first government – sponsored ,government –
supported and government subsidized financial agency in India which are
financed by RBI,NABARD,CENTRAL AND STATE GOVERNMENT .
 TYPES OF CO-OPERATIVE BANKS
1) Primary Agricultural Credit Societies is an
association of persons residing in particular
locality.
2) Central co-operative banks specific area normally
a district and are usually located in the district
headquarters of some prominent town of the
district.
3) State co-operative banks is also known as apex
bank , form the apex of the co-operative credit
structure in each state.
 Provisions Under Companies Act:

• The various regulations which govern the merchant bankers on the capital issue are
prescribed by the companies act, and the other enactments mentioned below.
1. Provisions of the Companies Act, 1956
a. Prospectus (Sec. 55 to 68A)
b. Allotment (Sec. 55 to 75)
c. Commissions and discounts (Sec. 76 & 77)
d. Issue of shares at premium and at discount (Sec. 78 & 79)
e. Issue and redemption of preference shares (Sec. 80 & 80A)
f. further issues of capital (Sec. 81)
g. Nature, numbering and certificate of shares (Sec. 82 to 84)
h. Kinds of share capital and prohibition on issue of any other kind of shares (Sec.
85 & 86)
1. Matters to be specified in prospectus and reports to be set out therein (Schedule
11)
2. The Securities Contracts (Regulations) Act, 1957 regarding transactions in
securities
3. The Securities Contracts (Regulation)Rules, 1957.
SEBI Guidelines: (SEBI Guidelines for Merchant Bank)
Operational Guidelines: SEBI has pronounced the following guidelines for merchant
bankers :
1. Submission of offer document :
2. Dispatch of issue material
3. Underwriting
4. Compliance obligations
a. Association of resource personnel :
b. Redressal of investor grievances
c. Submission of post issue monitoring reports
d. Issue of No objection Certificate (NOC)
e. Registration of merchant bankers
f. Reporting requirements
g. Impositions of penalty points
Meaning of stock exchanges :
• It is the market for exchange of stocks.
• ‘Stocks’ refers to the old securities.
• These securities are purchased and sold continuously
• Makes continuous evaluation of securities traded in the market.
Definition of Stock Exchange:
According to Hastings, “Stock exchange or securities
market comprises all the places where buyers and sellers of
stocks and bonds or their representatives undertake transactions
involving the sale of securities’
Functions of Stock Exchanges

1. Liquidity and marketability of Securities

2. Safety of Funds
3. Supply of Long term funds
4. Flow of Capital to Profitable Ventures.
5. Motivation for improved performance
6. Promotion of Investment
7. Reflection of Business Cycle
8. Marketing of New Issues
9. Miscellaneous Services
OTCEI ( Over the Counter Exchange of India )

• It is a Stock Exchange without a proper trading floor

• OTCEI is connected through a computer network and the transactions
are taking place through computer operations.
• OTCEI has been incorporated under Section 25 of the companies Act.
• This company was promoted by a group of financial institutions owned
by Government of India,
• It consists of UTI, ICICI, IDBI, SBI Capital Market , IFCI, LIC, GIC
and CAN BANK financial Services.