NATIONAL LAW INSTITUTE UNIVERSITY,

BHOPAL

TENTH TRIMESTER

LAWS ON BUSINESS ASSOCIATIONS II

PROJECT ON

The Functions, Role and Importance of Merchant

Bankers in the Securities Market: A Detailed Study

SUBMITTED TO:

SUBMITTED BY:

PROF.(Dr.)KONDIAH JONNALAGADDA

NIMISHA JHA

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2009BALLB01

ENROLMENT NO.: A-0863

TABLE OF CONTENTS

INTRODUCTION..................................................

..............................................................

..03

CAPITAL MARKET

INTERMEDIARIES................................................

.......................04

FINANCIAL

SERVICES......................................................

................................................04

MERCHANT BANKERS:

MEANING.......................................................

........................05

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MERCHANT BANKERS: ORIGIN AND

DEVELOPMENT.........................................07

MERCHANT BANKERS:

INDIA.........................................................

...............................09

MERCHANT BANKERS:

FUNCTIONS.....................................................

.......................10

MERCHANT BANKERS:

REGULATIONS...................................................

...................13

CONCLUSION....................................................

..............................................................

.....21

BIBLIOGRAPHY..................................................

..............................................................

..23

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INTRODUCTIONCompanies raise capital by issuing securities in the market.

Merchant bankers act as intermediaries between the issuers of

capital and the ultimate investors who purchase these

securities. Merchant banking may be defined as an ‘institution

which covers a wide range of activities such as underwriting

of shares, portfolio management, project counselling,

insurance etc.

Merchant Banking is a combination of banking and consultancy

services. It provides consultancy, to its clients, for

financial, marketing, managerial and legal matters.

Consultancy means to provide advice, guidance and service for

a fee. It helps a businessman to start a business. It helps to

raise (collect) finance. It helps to expand and modernise the

business. It helps in restructuring of a business. It helps to

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revive sick business units. It also helps companies to

register, buy and sell shares at the stock exchange.

In short, merchant banking provides a wide range of services

for starting until running a business. It acts as Financial

Engineer for a business.

Fundamentally, merchant banking division is regarded as a

project-evaluation instrument.

It provides expert knowledge and help in the floatation of new

companies, the preparation, planning and execution of new

projects, and the management and promotion of industrial

enterprises as well as their financing. Basically, however,

merchant banks are more service-oriented.

Their main function is to guide the preparation, planning,

evaluation and execution of projects which are helpful to the

growth of industries.

The need for merchant banking was vehemently stressed by the

Banking Commission (1972).

According to the commission, merchant banking institutions are

to offer services like syndication of financing, promotion of

projects, investment management and advisory services to

medium and small savers and to provide funds and trusts to

various types.

Merchant banking was first started in India in 1967 by

Grindlays Bank. It has made rapid progress since 1970.

The merchant banking activity in India is governed by SEBI

(Merchant Bankers) Regulations, 1992. Registration with SEBI

is mandatory to carry out the business of merchant banking in

India.

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CAPITAL MARKET INTERMEDIARIESCapital market intermediaries are a vital link between the

regulators, issuers and investor. Any aberrations in the

capital markets has presumably direct bearing on the

intermediaries, their governance processes and practices which

in turn affect the confidence of the markets. It is therefore

necessary to ensure good governance practice of the

intermediaries and also to have constant monitoring and

surveillance on the acts of the intermediaries.

The Securities and Exchange Board of India Act, 1992 was

framed to provide for the establishment of a Board to protect

the interest of investors in securities and to promote the

development of and regulate the securities market and for

matter connected therewith and incidental thereto.

FINANCIAL SERVICESFinancial services are services that ensure the smooth flow of

financial activities in the economy. Those include banking,

insurance, stock broking and investment services as well as

business and professional services. These services cater the

need of financial institutions, financial markets and

financial instruments financial services include the services

offered by both Asset Management companies and Liability

Management companies.

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Financial Services help to raise the required funds but also

ensure their efficient deployment. This helps to ensure an

efficient management of funds, services such as bill

discounting, factoring of debtors, parking of short term funds

in money market, e-commerce and securitization of debts are

provided by financial service firms. This sector provides

services such as banking, insurance, credit rating, lease

financing, factoring, venture capital, mutual funds, merchant

banking, stock lending, depository services, housing finance.

Financial services industry classifies the financial services

under three broad categories: Fee Based services, Fund Based

services and Insurance Services.

1. Fee Based Services: Financial institutions operate in

specialized fields to earn a substantial income by way of

fees, dividend commission, discount and brokerage on

operations. Issue Management, Corporate Advisory

Services, Credit Rating, Mutual Funds and Assets

Securitization

2. Fund Based Services: The firm raises funds through

equity, debt, and deposits and invests these funds in

securities or lends to those who are in need of capital.

Leasing and Hire Purchase, Hosting Finance, Credit Cards,

Venture Capital, and Bill Discounting.

MERCHANT BANKERS: MEANINGMerchant banking implies investment management. Companies

raise capital by issuing securities in the market. Merchant

bankers act as intermediaries between the issuers of capital

and the investors who purchase these securities.

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Merchant banking is the financial intermediation that matches

the entities that need capital and those that have capital for

investment.

The services provided by merchant bankers include management

of mutual funds, public issues, trusts, securities and

international funds. It involves dealing with the corporate

clients and advising them on various issues like- mergers,

acquisitions, public issues, etc.

Merchant banking is skill based activities and involves

serving every financial need of every client. It requires

focused skill-base to provide for the requirements of the

client.

SEBI has made the quality of man-power as one of the criteria

for registration as merchant banker. These skills should not

be concentrated in issue management and underwriting alone,

which may have an adverse impact on business. Merchant bankers

can turn to any of the activities mentioned above depending

upon resources, such as capital, foreign tie-ups for overseas

activities and skills.

The depth and sophistication in merchant banking business are

improving since the avenues for participating in capital

market activities have widened from issue management and

underwriting to private placement, bought out deals (BODS),

buy-back of shares, mergers and takeovers.

Merchant banking is a much desired innovative step undertaken

by the commercial banks in India.

The need for merchant banking was vehemently stressed by the

Banking Commission (1972).

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According to the commission, merchant banking institutions are

to offer services like syndication of financing, promotion of

projects, investment management and advisory services to

medium and small savers and to provide funds and trusts to

various types.

The National & Grind lays Banks was the first to introduce

merchant banking services in 1967, followed by the First

National City Bank in 1970.

Among the Indian banks, however, the State Bank of India is

the pioneer in starting Merchant Banking Division in 1972.

Other public sector banks such as the Bank of Baroda, Canara

Bank, Bank of India, UCO Bank etc., entered into merchant

banking in the late seventies and early eighties.

Fundamentally, merchant banking division is regarded as a

project-evaluation instrument.

It provides expert knowledge and help in the floatation of new

companies, the preparation, planning and execution of new

projects, and the management and promotion of industrial

enterprises as well as their financing. Basically, however,

merchant banks are more service-oriented.

Their main function is to guide the preparation, planning,

evaluation and execution of projects which are helpful to the

growth of industries.

The Notification of the Ministry of Finance defines merchant

banker as “Any person who is engaged in the business of issue management

either by making arrangements regarding selling, buying or subscribing to securities

as manager-consultant, advisor or rendering corporate advisory services in relation

to such issue management”

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The Amendment Regulation specifies that issue management

consist of Prospectus and other information relating to issue,

determining financial structure, tie-up of financiers and

final allotment and refund of the subscriptions, underwriting

and portfolio management services.

In the words of Skully “A Merchant Bank could be best defined as a

financial institution conducting money market activities and lending, underwriting

and financial advice, and investment services whose organization is characterized by

a high proportion of professional staff able to able to approach problems in an

innovative manner and to make and implement decisions rapidly.”

MERCHANT BANKERS:

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ORIGIN AND DEVELOPMENTA Merchant Bank is a British term for a bank providing various

financial services such as accepting bills arising out of

trade, providing advice on acquisitions, mergers, foreign

exchange, underwriting new issues, and portfolio management. A

Merchant Bank can be generally described as a financial

services company with a private equity investment arm offering

investment banking and ancillary services as well. Because a

merchant bank acts not only as an advisor and broker but also

as a principal, a merchant bank has a longer term approach

than a typical investment bank and is highly concerned with

the viability of each investment opportunity and providing the

right advice for a strong partnership with each client

company.

A Merchant Bank is a British term for a bank providing various

financial services such as accepting bills arising out of

trade, providing advice on acquisitions, mergers, foreign

exchange, underwriting new issues, and portfolio management. A

Merchant Bank can be generally described as a financial

services company with a private equity investment arm offering

investment banking and ancillary services as well. Because a

merchant bank acts not only as an advisor and broker but also

as a principal, a merchant bank has a longer term approach

than a typical investment bank and is highly concerned with

the viability of each investment opportunity and providing the

right advice for a strong partnership with each client

company.

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In banking, a merchant bank is a traditional term for an

Investment Bank. It can also be used to describe the private

equity activities of banking. This article is about the

history of banking as developed by merchants, from the Middle

Ages onwards.

Amidst the swift changes sweeping the financial world,

Merchant Banking has emerged as an indispensable financial

advisory package. Merchant banking is a service-oriented

function that transfers capital from those who own to those

who can use it. They try to identify the needs of the

investors & corporate sector & advice entrepreneurs what to do

to be successful.

Merchant Banking, as the term has evolved in Europe from the

18th century to today, pertained to an individual or a banking

house whose primary function was to facilitate the business

process between a product and the financial requirements for

its development. Merchant banking services span from the

earliest negotiations from a transaction to its actual

consummation between buyer and seller.

In particular, the merchant banker acted as a capital sources

whose primary activity was directed towards a commodity

trader/cargo owner who was involved in the buying, selling,

and shipping of goods. The role of the merchant banker, who

had the expertise to understand a particular transaction, was

to arrange the necessary capital and ensure that the

transaction would ultimately produce "collectable" profits.

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Often, the merchant banker also became involved in the actual

negotiations between a buyer and seller in a transaction.

During the 20th century, however, European merchant banks

expanded their services. They became increasingly involved in

the actual running of the business for which the transaction

was conducted. Today, merchant banks actually own and run

businesses for their own account, and that of others.

Since the 18th century, the term merchant banker has,

therefore, been considerably broadened to include a composite

of modern day skills. These skills include those inherent in

an entrepreneur, a management advisor, a commercial and/or

investment banker plus that of a transaction broker. Today a

merchant banker is who has the ability to merchandise -- that

is, creates or expands a need -- and fulfil capital

requirements. The modern European merchant bank, in many ways,

reflects the early activities and breadth of services of the

colonial trading companies.

Most companies that come to a U.S. merchant bank are looking

to increase their financial stability or satisfy a particular,

immediate capital need.

Professional merchant bankers must have:

1) An understanding of the product, its industry and

operational management;

2) An ability to raise capital which might or might not be

one's own (originally merchant bankers supplied their own

capital and thereby took an equity interest in the

transaction);

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3) And most importantly, effective skills in concluding a

transaction - the actual sale of the product and the

collection of profit.

Some people might question whether or not there are many

individuals or organizations that have the abilities to fulfil

all three areas of expertise.

MERCHANT BANKERS: INDIAMerchant banking activities help in channelizing the financial

surplus of the general public into productive investment

avenues. They help to coordinate the activities of various

intermediaries to the share issue such as the registrar,

bankers, advertising agency, printers, underwriters, brokers,

etc. and to ensure the compliance with rules and regulations

governing the securities market. This being the era where

mergers and acquisitions are hot, the scope of merchant

banking has grown to a large extent.

Merchant banking activity was formally initiated into the

Indian capital Markets when Grind lays bank received the

license from Reserve Bank in 1967. Grind lays started with

management of capital issues, recognized the needs of emerging

class of entrepreneurs for diverse financial services ranging

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from production planning and system design to market research.

Even it provides management consulting services to meet the

requirements of small and medium sector rather than large

sector.

Citibank Setup its merchant banking division in 1970. The

various tasks performed by this divisions namely assisting new

entrepreneur, evaluating new projects, raising funds through

borrowing and issuing equity. Indian banks Started banking

Services as a part of multiple services they offer to their

clients from 1972.

State bank of India started the merchant banking division in

1972. In the initial years the SBI’s objective was to render

corporate advice and assistance to small and medium

entrepreneurs. Merchant banking activities is of course

organized and undertaken in several forms.

Commercial banks and foreign development finance institutions

have organized them through formation divisions, nationalized

banks have formed subsidiaries companies and share brokers and

consultancies constituted themselves into public limited

companies or registered themselves as private limited

companies. Some merchant banking outfits have entered into

collaboration with merchant bankers abroad with several

branches.

In general, however, the merchant banking activities of the

Indian banks have been largely confined to the management of

public issues and loan syndications.

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They have yet to develop expertise in the fields of projects

counselling, corporate counselling, capital restructuring,

portfolio management, etc.

The Indian merchant bankers pay little attention to the

problem of industrial sickness or the growth of small scale

industrial units.

MERCHANT BANKERS: FUNCTIONSThe important functions of merchant banking are depicted

below.

1. Raising Finance for Clients: Merchant Banking helps its

clients to raise finance through issue of shares, debentures,

bank loans, etc. It helps its clients to raise finance from

the domestic and international market. This finance is used

for starting a new business or project or for modernization or

expansion of the business. This forms the main function of the

merchant banker. He assists the companies in raising funds

from the market. The undergoing tasks include instrument

designing, pricing the issue, registration of the offer

document, underwriting support, marketing of the issue,

allotment and refund and listing on stock exchanges.

2. Broker in Stock Exchange: Merchant bankers act as brokers

in the stock exchange. They buy and sell shares on behalf of

their clients. They conduct research on equity shares. They

also advise their clients about which shares to buy, when to

buy, how much to buy and when to sell. Large brokers, Mutual

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Funds, Venture capital companies and Investment Banks offer

merchant banking services. The merchant banker helps in

distributing various securities like equity shares, debt

instruments, mutual funds, insurance products, and commercial

paper, to name a few. The distribution network of the merchant

banker can be classified as institutional and retail in

nature. The institutional network consists of mutual funds,

foreign institutional investors; private equity funds pension

funds, financial institutions, etc.

3. Project Management: Merchant bankers help their clients in

the many ways. For e.g. advising about location of a project,

preparing a project report, conducting feasibility studies,

making a plan for financing the project, finding out sources

of finance, advising about concessions and incentives from the

government. Merchant bankers help their clients in various

stages of the project undertaken by the clients. They assist

them in conceptualizing the project idea in the initial stage.

Once the idea is formed, they conduct feasibility studies to

examine the viability of the proposed project.

4. Advice on Expansion and Modernization: Merchant bankers

give advice for expansion and modernization of the business

units. They give expert advice on mergers and amalgamations,

acquisition and takeovers, diversification of business,

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foreign collaborations and joint-ventures, technology

Upgradation, etc.

5. Managing Public Issue of Companies: Merchant bank advice

and manage the public issue of companies. They provide

following services:

i. Advise on the timing of the public issue.

ii. Advise on the size and price of the issue.

iii. Acting as manager to the issue, and helping in accepting

applications and allotment of securities.

iv. Help in appointing underwriters and brokers to the issue.

v. Listing of shares on the stock exchange, etc.

6. Handling Government Consent for Industrial Projects: A

businessman has to get government permission for starting of

the project. Similarly, a company requires permission for

expansion or modernization activities. For this, many

formalities have to be completed. Merchant banks do all this

work for their clients.

7. Special Assistance to Small Companies and Entrepreneurs:

Merchant banks advise small companies about business

opportunities, government policies, incentives and concessions

available. It also helps them to take advantage of these

opportunities, concessions, etc.

8. Services to Public Sector Units: Merchant banks offer many

services to public sector units and public utilities. They

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help in raising long-term capital, marketing of securities,

foreign collaborations and arranging long-term finance from

term lending institutions.

9. Revival of Sick Industrial Units: Merchant banks help to

revive (cure) sick industrial units. It negotiates with

different agencies like banks, term lending institutions, and

BIFR (Board for Industrial and Financial Reconstruction). It

also plans and executes the full revival package.

10. Portfolio Management: A merchant bank manages the

portfolios (investments) of its clients. This makes

investments safe, liquid and profitable for the client. It

offers expert guidance to its clients for taking investment

decisions.

11. Corporate Restructuring: It includes mergers or

acquisitions of existing business units, sale of existing unit

or disinvestment. This requires proper negotiations,

preparation of documents and completion of legal formalities.

Merchant bankers offer all these services to their clients.

Merchant bankers offer customized solutions to their clients’

financial problems. Financial structuring includes determining

the right debt-equity ratio and the framing of appropriate

capital structure theory.

12. Money Market Operation: Merchant bankers deal with and

underwrite short-term money market instruments, such as:

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i. Government Bonds.

ii. Certificate of deposit issued by banks and financial

institutions.

iii. Commercial paper issued by large corporate firms.

iv. Treasury bills issued by the Government (Here in India by

RBI).

13. Leasing Services: Merchant bankers also help in leasing

services. Lease is a contract between the lessor and lessee,

whereby the lessor allows the use of his specific asset such

as equipment by the lessee for a certain period. The lessor

charges a fee called rentals.

14. Management of Interest and Dividend: Merchant bankers help

their clients in the management of interest on debentures /

loans, and dividend on shares. They also advise their client

about the timing (interim / yearly) and rate of dividend.

15. Loan Syndication: Merchant bankers arrange to tie up loans

for their clients. This takes place in a series of steps.

Firstly, they analyze the pattern of the client’s cash flows,

based on which the terms of the borrowings can be defined.

Then the merchant banker prepares a detailed loan memorandum,

which is circulated to various banks and financial

institutions and they are invited to participate in the

syndicate. The banks then negotiate the terms of lending on

the basis of which the final allocation is done.

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MERCHANT BANKERS: REGULATIONSAccording to the book "Financial Services," major merchant

banking guidelines were first established in 1990, with SEBI

amendments being introduced after the Securities and Exchange

Board of India Act in 1992.

The guidelines require that all merchant bankers must have

experience in finance, law or business management, as well as

adequate office space, equipment and manpower to provide

service of a professional calibre. Sufficient manpower is

considered to be at least two persons with proficiency in

merchant banking.

According to the 1992 guidelines, merchant bankers were

classified into one of four categories: management,

consulting, advising or underwriting.

In 2007, however, a merchant banker's role became more

restricted and was limited to buying, selling or advising on

investment securities. A merchant banker must file a separate

registration for underwriting and portfolio manager

privileges.

Further, a merchant banker cannot perform functions typical to

a retail bank, such as accepting deposits or leasing, but must

involve itself only in matters directly related to the capital

market.

The SEBI oversees all aspects of merchant banking and may

suspend or revoke a merchant banker's status if guidelines or

laws are violated.

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Merchant bankers must submit quarterly reports detailing all

transactions, including the names of involved companies or

parties and the transaction amount. Transactions involving

more than $21 million (as of 2007, converted from Indian

Rupees) may be handled by a maximum of five lead managers. In

addition, corporate bodies and other parties must be aware of

mutual rights, liabilities and obligations before finalizing

any transaction.

The SEBI also monitors merchant banking employees by mandating

that information about each employee be submitted for entry

into an SEBI-managed database.

Registration:The merchant banking activity in India is governed by SEBI

(Merchant Bankers) Regulations, 1992. Registration with SEBI

is mandatory to carry out the business of merchant banking in

India. An applicant should comply with the following norms:

1. The applicant should be a corporate body.

2. The applicant should not carry on any business other than

those connected with the securities market.

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3. The applicant should have necessary infrastructure like

office space, equipment, manpower, etc.

4. The applicant must have at least two employees with prior

experience in merchant banking.

5. Any associate company, group company, subsidiary or

interconnected company of the applicant should not have

been a registered merchant banker.

6. The applicant should not have been involved in any

securities scam or proved guilt for any offence.

7. The applicant should have a minimum net worth Rs50

million.

Merchant bankers are compulsory registered with the SEBI to

carry out their activities. They fall in four categories.

1. Category I merchant bankers carry on any activity

relating to issue management, i.e. preparation of

prospectus and other information relating to the issue,

determining financial structure, tie-up of financiers and

final allotment of securities and refund of the

subscription. They can also act as advisor, consultant,

manager, underwriter or portfolio manager.

2. Category II merchant bankers can act as advisor,

consultant co-manager, underwriter, portfolio manager.

3. Category III merchant bankers can act as an underwriter,

advisor and consultant to an issue. Thus, only Category I

merchant bankers can act as lead managers to an issue.

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Capital Adequacy Requirement: A merchant banker is granted recognition by the SEBI in

different categories on the basis of capital adequacy norms in

terms of its net worth comprising of paid-up capital and free

reserves. The minimum net worth requirements for each category

is:

1. Rs 5 crore (Category I),

2. Rs 0.5 crore (Category II),

3. Rs 0.2 crore (Category III) and

4. For Category IV nil.

Apart from minimum capital requirement, the merchant bankers

are expected to have the necessary infrastructure like

adequate office space, equipment and manpower to effectively

discharge their activities. They should employ at least two

persons with experience to conduct merchant banking business;

they should not be involved in any litigation connected with

the securities market, have professional qualification in

finance, law or business management and, finally their

registration is in the interest of the investors.

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Underwriting obligations (Regulation 22)In respect of every issue to be managed, the lead merchant

banker holding a certificate under Category I shall accept a

minimum Underwriting obligation of five percent of the total

underwriting commitment or rupees twenty-five lacs, whichever

is less: [Regulation 2 (1)]

Provided that, if the lead merchant banker is unable to accept

the minimum underwriting obligation, that lead merchant banker

shall make arrangement for having the issue underwritten to

that extent by a merchant banker associated with the issue and

shall keep the Board informed of such arrangement.

The lead merchant banker, who is responsible for verification

of the contents of a prospectus or the Letter of Offer in

respect of an issue and the reasonableness of the views

expressed therein, shall submit to the Board at least two

weeks prior to the opening of the issue for subscription, a

due diligence certificate in Form C of the Regulations

(Regulation 23)

Documents to be furnished to the Board

(Regulation 24)The lead manager responsible for the issue shall furnish to

the Board, the following documents, namely: -

1. particulars of the issue;

2. draft prospectus or where there is an offer to the

existing shareholders, the draft letter of offer;

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3. any other literature intended to be circulated to the

investors, including the shareholders; and

4. Such other documents relating to prospectus or letter of

offer as the case may be.

The documents referred to in sub-regulation (1) shall be

furnished at least two weeks prior to date of filing of the

draft prospectus or the letter of offer, as the case may be,

with the Registrar of Companies or with the Regional Stock

Exchanges, or with both.

The lead manager shall ensure that the modifications and

suggestions, if any, made by the Board on the draft prospectus

or the Letter of Offer as the case may be, with respect to

information to be given to the investors are incorporated

therein.

The lead manager undertaking the responsibility for refunds or

allotment of securities in respect of any issue shall continue

to be associated with the issue till the subscribers have

received the share or debenture certificates or refund of

excess application money; (Regulation 25)

Provided that where a person other than the lead manager is

entrusted with the refund or allotment of securities in

respect of any issue, the lead manager shall continue to be

responsible for ensuring that such other person discharges the

requisite responsibilities in accordance with the provisions

of the Companies Act and the listing agreement entered into by

the body corporate with the stock- exchange. (Regulation 25)

No merchant banker or any of its directors, partner or manager

or principal officer shall either on their respective accounts

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or through their associates or relatives enter into any

transaction in securities of bodies corporate on the basis of

unpublished price sensitive information obtained by them

during the course of any professional assignment either from

the clients or otherwise. (Regulation 26)

Every merchant banker shall submit to the Board complete

particulars of any transaction for acquisition of securities

of anybody corporate whose issue is being managed by that

merchant banker within fifteen days from the date of entering

into such transaction. (Regulation 27)

Disclosures to the Board (Regulation 28)A merchant banker shall disclose to the Board as and when

required, the following information, namely:-

1. his responsibilities with regard to the management of the

issue;

2. any change in the information or particulars previously

furnished, which have a bearing on the certificate

granted to it;

3. the names of the body corporate whose issues he has

managed or has been associated with;

4. the particulars relating to breach of the capital

adequacy requirement as specified in regulation 7;

5. Relating to his activities as a manager, underwriter,

consultant or adviser to an issue as the case may be.

Code of conduct:

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Every merchant banker has to abide by the code of conduct as

specified below:

A merchant banker in the conduct of his business has to

observe high standards of integrity and fairness in all his

dealings with his clients and other merchant bankers.

He ought to render at all times high standards of service,

exercise due diligence, ensure proper care and exercise

independent professional judgment. He has to, wherever

necessary, disclose to the clients, possible sources of

conflict of duties and interest, while providing services.

He cannot make any statement or become privy to any act,

practice unfair competition, which is likely to be harmful to

the interest of other merchant bankers or is likely to place

such other merchant bankers in a disadvantageous position in

relation to him, while competing for or executing any

assignments.

He should not make any exaggerated statement, whether oral or

written, to the client either about his qualification or his

capability to render certain services or his achievements in

regard to services rendered to other clients.

A merchant banker has always to endeavour to

(1) Render the best possible advice to the clients having

regard to the clients’ needs and the requirements and his own

professional skill; and

(2) Ensure that all professional dealings are affected in a

prompt, efficient and cost effective manner.

He should not

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(1) Divulge to other clients, press or any other party any

confidential information about his client which has come to

his knowledge; and

(2) Deal in securities of any client company without making

disclosure to the SEBI as required under the regulations and

also the board of directors of the client company.

He should endeavour to ensure that

(1) The investors are provided with true and adequate

information without making any misguided or exaggerated claims

and are made aware of attendant risks before any investment

decision is taken by them:

(2) Copies of prospectus, memorandum and related literature

are made available to the investors;

(3) Adequate steps are taken for the fair allotment of share

application and transfers, listing of securities arrangement

of underwriting/sub-underwriting, placing of issues, selection

of brokers, bankers to the issue, publicity and advertising

agents, printers, etc. In view of the overwhelming importance

of merchant bankers in the process of capital issues, it is

now mandatory that all public issues should be managed by

merchant banker(s) functioning as the lead manager(s). In the

case of right issues not exceeding Rs 50 lakh, such

appointments may not be necessary.

Responsibilities of Lead ManagersEvery lead managers has to enter into an agreement with the

issuing companies setting out their mutual rights, liabilities

and obligation relating to such issues and in particular to

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disclosures, allotment and refund. A statement specifying

these is furnished to the SEBI at least one month before the

opening of the issue for subscription. In case of more than

one lead manager, the statement has to provide details about

their respective responsibilities. A lead merchant banker

cannot manage an issue if the issuing company is his

associate. He can also not associate with a merchant banker

who does not hold a certificate of registration with the SEBI.

It is necessary for a lead manager who is Category I merchant

banker, to accept a minimum underwriting obligation of 5

percent of the total underwriting commitment or Rs 25 lakh,

whichever is less. If he is unable to do so, he has to make

arrangements for underwriting of an equal amount by a merchant

banker associated with that issue under intimation to the

SEBI.

Due Diligence Certificate: The lead manager is responsible for the verification of the

contents of a prospectus/letter of offer in respect of an

issue 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 issue for subscription, a due diligence

certificate to the effect that

(1) They are in conformity with the documents/materials and

papers relevant to the issue.

(2) All legal requirements connected with the issue have fully

complied with, and

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(3) The disclosures are true, fair and adequate to enable the

investors to make a well-formed decision as to the investment

in the proposed issue.

Submission of Documents: The lead managers to an issue have to submit to the SEBI, at

least two weeks before the date of filing with the registrar

of companies/regional stock exchanges or both, particulars of

the issue, draft prospectus/letter of offer, other literature

to be circulated to the investors/ share holders and so on to

the SEBI. They have to ensure that the

modifications/suggestions made by it with respect to the

information to be given to the investors are duly

incorporated. They have to continue to be associated with the

issues till the subscribers have received the share/debenture

certificates or the refund of excess application money.

Acquisition of Shares: A merchant banker is prohibited from acquiring securities of

any company on the basis of unpublished price sensitive

information obtained during the course of any professional

assignment either from the client or otherwise. He has to

submit to the SEBI complete particulars of any acquisition of

securities of a company whose issue is being managed by him

within 15 days from the date of the transaction.

Disclosure to SEBI: As and when required, a merchant banker has to disclose to the

SEBI:

(1) His responsibilities with regard to the management of the

issue,

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(2) Any change in the information/particulars previously

furnished which have a bearing on the certificate of

registration granted to it,

(3) The names of the companies whose issues he has managed or

has been associated with

(4) The particulars relating to the breach of capital adequacy

requirements, and

(5) Information relating to his activities as manager,

underwriter, consultant or advisor to an issue.

Procedure for Inspection:The SEBI can undertake inspection of the books of accounts,

records, and documents of a merchant banker to ensure that the

books are maintained in the manner required, the provision of

the SEBI Act, rules, regulations are being complied with, and

to investigate complaints from investors/other merchant

bankers/any other person or any matter having a bearing on his

activities as a merchant banker and to investigate suo moto in

the interest of securities business/investors into the affairs

of the merchant banker.

The merchant banker has an obligation to furnish all

information called for, allow a reasonable access to the

premises, extend reasonable facility for examination of

books/records/ documents/computer data and provide copies of

the same and give all assistance to the inspecting authority

in connection with the inspection.

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CONCLUSION: NEED AND IMPORTANCE OF

MERCHANT BANKERSImportant reasons for the growth of merchant banks has been

development activities throughout the country, exerting excess

demand on the sources of fund for ever expanding industries

and trade, thus leaving a widening gap unabridged between the

supply and demand of invisible funds. All financial

institutions had experienced constrain of resources to meet

ever increasing demands for demands for funds frame corporate

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sector enterprises. In such circumstances corporate sector had

the only alternative to avail of the capital market service

for meeting their long term financial requirement through

capital issue of equity shares and debentures. Growing demand

for funds put pressure on capital market that enthused

commercial banks, share brokers and financial consultancy

firms to enter into the field of merchant banking and share

the growing capital market. As a result all the commercial

banks in nationalized and public sector as well as in private

sector including foreign banks in India have opened their

merchant banking windows and competing in this field.

Need for merchant banking is felt in the wake of huge public

saving lying untapped. Merchant banker can play highly

significant role in mobilizing funds of savers to invisible

channels assuring promising returns on investment and thus can

assist in meeting the widening demand for invisible funds for

economic activity. With growth of merchant banking profession

corporate enterprises in both private sectors would be able to

raise required amount of funds annually from the capital

market to meet the growing requirement for funds for

establishing new enterprises, undertaking expansion,

modernization and diversification of the existing enterprises.

This reinforces the need for a vigorous role to be played by

merchant banking.

In view of multitude of enactment, rules and regulation,

gridlines and offshoot press release instructions brought out

the government from time to time imposing statutory

obligations upon the corporate sector to comply with those

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entire requirement prescribed there in the need of a skilled

agency existed which could provide counselling in these

matters in a package form. A merchant banker with their skills

updated information and knowledge provide this service to the

corporate units and advice them on such requirement to be

complied with for raising funds from the capital market under

different enactment viz. companies act, income tax act,

foreign exchange regulation act, securities contracts

corporate laws and regulations.

Merchant bank advice the investors of the incentives available

in the form of tax relief, other statutory relaxation, good

return on investment and capital appreciation in such

investment to motivate them to invest their savings securities

of the corporate sector. Thus merchant banks help industries

and trade to rise and the investors to invest their saved

money in sound and healthy concern with confidence, safety and

expectation for higher yields. Finance is the backbone of

business activities. Merchant banker make available finance

for business enterprises acting as intermediaries between them

raising demand for funds and the supplies of funds besides

rendering various other services.

The following are some of the reasons why specialist merchant

bank have a crucial role to play in India.

1. Growing complexity in rules and procedures of the

government.

2. Growing industrialization and increase of technologically

advanced industries.

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3. Need for encouragement of small and medium

industrialists, who require specialist services.

4. Need to develop backward areas and states which require

different criteria.

5. Exploring the possibility of joint ventures abroad and

foreign market.

6. Promoting the role of new issue market in mobilizing

saving from where merchant banks function as an

independent wing or as subsidiary of various

private/central governments/ state government financial

institution. Most of the financial institution in India

is in public sector and therefore such setup plays a role

on the lines of governmental priorities and policies.

BIBLIOGRAPHY

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http://kannanpersonal.com/content/stock/intermediary/merchant-

banker2.html

http://www.citeman.com/5557-responsibilities-of-lead-managers.html

http://shodhganga.inflibnet.ac.in/bitstream/10603/3566/11/11_chapter

%204.pdf

http://www.citeman.com/5558-obligations-and-responsibilities-of-merchant-

banks.html

http://www.indianmba.com/Faculty_Column/FC537/fc537.html

http://yehseeyes.blogspot.com/2010/08/merchant-bankers-regulation-

amendment.html

http://www.ehow.com/list_6948373_sebi-regulations-merchant-banking.html

http://www.ehow.com/facts_7518645_sebi-code-conduct.html

http://www.asialaw.com/Article/1988860/Channel/16958/Merchant-

Banking.html

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%203.pdf

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