Simple Notes Based on PDF

(41) NON-banking Financial COMprr"” ~

1.8 MERCHANT BANKING in. the

4 : pankers :

it : ts no ; rvice

| Merchant banks are neither eee non-banking sue l

| Indian context, they are non-fund pete ‘ ecialized financla

} organizations. A merchant banker 1s 4 ae capital from those

middle person who helps to collect and trans

who possess it to those who need it.

1.8.1 The Concept ich

ules 1992 defines

SEBI (Merchant Bankers) Regulations& R ee ,

a merchant banker as “any person who is engage

i 956 and is

> An NBFC is financial institution registered under the Companies so years re

engaged in the business of loans and advances, leasing, hire-pure > €

business, chit business etc.

Introduction t0 Financial Service: $$ $< @ $@™—-m- ”

of issue management either by making arrangements pes

selling, buying or subscribing to securities as manage f, CONS! j '

such issue management”, Merchant bankers (MBs) undertake any

activity in capital issues and play different roles like lead manager,

book runner, Co-managers, underwriters, consultants, and the

duties of a portfolio manager. They are specialized agencies, like

a bank, corporate body, firm or proprietary concern whose main

pusiness is to attract money from the public to capital issues.

1.8.2 Scope of Activities

Over the years, the merchant banks in India have diversified

their activities beyond issue management and loan syndication.

They cover a wide range of activities which are fund-based and

non-fund based, financial and investment services. The non-fund

based activities include; capital issues management and private

placement of securities, loan syndication, corporate counselling,

project counselling, NRI counselling, trusteeship management,

portfolio management, management of mergers and amalgamations,

financial engineering, capital restructuring, inter-corporate

investment of funds, lease broking, equipment procurement,

finance liaison etc. Many of these activities do not come under

the ambit of SEBI.

Merchant Banking vs. Commercial banking

Banking regulation Act defines banking as accepting

money for the purpose of lending or investment from the

public, repayable on demand. Section 6 of the Banking

which include merchant-banking activities also. In fact many

commercial banks have set up their merchant banking

divisions, However, a merchant bank cannot undertake

banking business unless it is a banking company.

0—<$<$— $$ Financial Services

1.8.4 Role or Need and Importance of Merchant Bankers

The financial reforms initiated in 1991 expanded industry

and trade, This created excess demand for the sources of funds.

The financial institutions could not meet this ever increasing

demand. Hence, the corporate sector turned to capital market

services for meeting their long-term financial requirements

through capital issues of equity and debentures. This enthused

the commercial banks, share brokers and financial consultancy

firms to enter into the field of merchant banking activities. Thus,

there has been a mushrooming of, “financial consultancy firms and

broker firms doing advisory functions as merchant bankers as well

as managing pubic issues in syndication with other merchant

bankers. The following specific areas highlight the role of

merchant banks in the Indian capital market.

1) Mobilization of fund: Merchant banks can play a highly

significant role in mobilizing funds from savers assuring

the widening demand for investable funds for economic

activity. With the growth of merchant banking profession

corporate enterprises, both in public and private sectors,

would be able to raise required amount of funds annually

from the capital market. They can use this for funds for

establishing new enterprises, undertaking expansion/

modernization/diversification of the existing enterprises etc,

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

merchant banks.

2) Promotional function: A dynamic merchant banker promptly

attends the corporate problems and suggest ways and means

to solve them. The nature of merchant banking services is

development oriented and promotional to help the industry

; and trade to grow and survive. A merchant banker is always

Introduction to Financial Services =———____

awake to renew his skills, develop expertise in new areas to

deal with the emerging problems of the corporate business

world.

3) Innovation: Government rules, regulations and policies

frequently change. Therefore, a merchant banker has to keep

pace with the changed environment. He also has to be aware

of the development in science and technology. These

diversifications, modernizations or replacements of existing

plant and machinery. This will create new demands for

finances and necessitate overhauling of the capital structure

of the firms. Merchant banker has to think and devise new

instruments of financing industrial projects. He guides the

wider section of the community possessing surplus money to

invest in corporate securities and other productive investment

channels. He helps the promoters with his knowledge and

skills to resolve the problems being faced by them.

4) Financial Services: The recent modifications of the Indian

capital market environment have transformed the various

financial institutions as the major sources of finance for the

organizations. Several new institutions have entered the

financial sector and merchant bankers have joined to expand :

| the range of financial services.

5) Market Makers: There are innovations of financial

instruments in Indian capital market. Non-convertible

debentures with detachable warrants, cumulative convertible

preference shares, zero coupon bonds, deep discount bonds,

triple option bonds, floating rate bonds, secured premium

notes, auction-rated debentures, etc. are some of them. The

MBs have to be market makers for these instruments too.

6) Consultancy Services: As a result of liberalization and

globalization, there is intense competition in the corporaty

sector. Companies are reviewing their strategies, structure,

and functioning for their survival and growth. This has led to

corporate restructuring including mergers, acquisitions, Splits,

disinvestments and financial restructuring. Merchant bankers

do these advisory services to the corporates.