In this essay we will discuss about Merchant Banking in India. After reading this essay you will learn about:- 1. Origin of Merchant Banking in India 2. Growth and Working of Merchant Banking in India 3. Functions 4. Working 5. Defects and Remedies.
Contents:
- Essay on the Origin of Merchant Banking in India
- Essay on the Growth and Working of Merchant Banking in India
- Essay on the Functions of Merchant Banking
- Essay on the Working of Merchant Banking
- Essay on the Defects and Remedies of Merchant Banking
Essay # 1. Origin of Merchant Banking in India:
The institution of merchant banking started in Britain where the merchant bankers were merchants engaged in financing foreign trade by accepting bill of exchange. They also carried out other banking services relating to foreign trade like dealing in gold, foreign currency and helping foreign borrowers to raise money in the London money market.
Since the beginning of the 20th century, they have expanded their functions to include advising firms on mergers, takeovers and other financial matters. They are active in the market for Eurocurrency and deal in hire-purchase and bullion. They also perform the functions of administration, promotion and distribution of securities and guarantee the issuer companies of certain price.
Essay # 2. Growth and Working of Merchant Banking in India:
In India before the advent of commercial banking, the indigenous bankers were performing the functions of merchant bankers. They provided finance and remittance facilities to traders and small industrialists by advancing loans; writing, buying and selling hundis; writing finance bills, and trade bills. They helped in financing internal trade.
Now merchant banking includes such services as management of public issues, loan syndication, financial and management consultancy, project counselling, mergers and acquisitions, management of non-resident investments, etc. The credit for starting merchant banking in India goes to foreign banks like Grindlays Bank, Citibank, etc. At present, a number of public sector banks are performing merchant banking services which are the subsidiaries of banks.
There are also private financial service companies, all India financial institutions like ICICI, IDBI, etc., private banking companies, foreign banking companies, and technical consultancy organisations which provide commercial banking services. Some of these are SBI Capital Markets Ltd., Bank of Baroda Merchant Bank Division, Canbank Financial Services Ltd. Allahabad Bank Finance Ltd., BOI Finance Ltd., DSP Financial Consultants, J.M. Financial and Investment Services Ltd., etc.
Essay # 3. Functions of Merchant Banking:
Merchant banks in India perform the following functions:
1. Managing Capital Issues.
Merchant banks manage new issues of companies by providing the following services:
(i) Working out the capital structure;
(ii) Drafting the prospectus;
(iii) Obtaining permission of SEBI;
(iv) Getting approval of stock exchanges;
(v) Arranging participation of institutions in the share capital of the company through private arid market placement;
(vi) Arranging underwriting of the issue from brokers, banks and financial institutions;
(vii) Selecting managers, brokers, issue houses and bankers to the issue;
(viii) Acting as managers to the issue themselves;
(ix) Undertaking the publicity of the issue;
(x) Receiving applications for shares and debentures, their allotment, collection of money and sending them to subscribers or informing the shareholders and depositories about them.
2. Advice on New Industrial Units:
They render advice to firms for setting up new industrial units relating to their location, technical collaborations, selecting appropriate technologies, financing, tax planning, obtaining approvals of governments, etc.
3. Project Formulation:
They help companies in formulating their projects by preparing pre-investment projects, project reports, and making market surveys, etc.
4. Loan Syndication:
They help companies in loan syndication by arranging finance from banks and financial institutions. For this, merchant banks prepare applications for submission to banks and financial institutions; undertake negotiations for sanction of loan facilities; collaborate with banks for working capital facilities, tie-up for consortium arrangements with financial institutions; and help in completing loan documents.
5. Trustees:
Merchant banks act as trustees of debenture holders when companies issue secured debentures. They arrange for their rating from the credit rating agencies to protect the interests of the debenture holders.
6. Restructuring and Mergers:
They render advice, formulate schemes and prepare documents on restructuring, mergers, amalgamations and takeovers of companies. They also help in obtaining approvals of concerned persons and authorities.
7. Portfolio Management:
Merchant banks manage the portfolios of companies by selling and purchasing their securities. They also provide them market intelligence and advisory services.
8. Equipment Leasing:
They help companies by procuring equipment and leasing it to companies.
9. Sick Industrial Units:
They help in rehabilitating sick industrial units. For this, they conduct studies, prepare reports for rehabilitation and arrange financial assistance from banks and financial institutions. As a last resort, they help in preparing a report for submission to the Board for Industrial and Financial Reconstruction (BIFR).
10. Advice to Non-Resident Indians:
Merchant banks help non-resident Indians (NRIs) who want to set up industrial units in India in the following ways: by rendering advice on projects, locations, investment opportunities, collaborations, managing capital issue, portfolio management, etc.
Essay # 4. Working of Merchant Banking:
Merchant banks in India are regulated by SEBI (Merchant Bankers) Regulations, 1992. They are required to register with SEBI for doing business. The SEBI regulations relating to merchant bankers were amended in 1996 and 1997 in order to bring structural changes in merchant banking activities.
The earlier four-fold categorisation of merchant bankers on the basis of different eligibility criteria was abolished. They have been replaced by one entity of merchant banker with a minimum net worth of Rs. 5 crore.
Only one body corporate is allowed to function as a merchant banker. The merchant banker is permitted to perform underwriting activity but is required to seek separate registration to function as a Portfolio Manager under the SEBI (Portfolio Manager) Rules and Regulations, 1993. At present, merchant bankers are prohibited to carry on fund based activities other than those related exclusively to the capital market.
The activities undertaken by NBFCs (Non- Banking Financial Companies) such as accepting deposits, leasing, bill discounting, etc. are not allowed to be undertaken by a merchant banker. Further, NBFCs operating as merchant bankers are required to separate their capital market related activities from their NBFCs activities. Distant relationship has also been introduced between an issue and the registrar to issue.
Essay # 5. Defects and Remedies of Merchant Banking:
There was a mushroom growth of merchant bankers in India prior to the SEBI (Merchant Bankers) Regulations Amendment, 1997. Merchant bankers were engaged in fraudulent and unfair trade practices. There was no transparency in the public offer document of new issues.
They made misleading statements to induce the sale of shares and debentures. They connived with the issuer company in floating bad issues and were involved in price rigging. In fact, they did not have experts to manage new issues.
SEBI has removed all the defects in the working of merchant bankers by amending its regulations in 1997. The disclosure requirements in offer documents have been made more transparent. Every prospectus is submitted to SEBI for approval before the public issue is made.
The size of issue, its firm allotment to different categories, means and sources of financing, year-wise break-up of proposed project expenditure, profit/loss statement, management perception of internal and external risk factors, mandatory underwriting by a merchant banker, etc. have been introduced.
Thus, SEBI has tried to remove the defects of merchant bankers through strict regulation. As a result, there are a few merchant bankers which are operating successfully in the capital market.