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This chapter will help the readers to:
◦ Recall what a merchant bank is.
◦ Understand the functions performed by merchant
banks.
◦ Analyse how merchant bank is different from
commercial banks.
◦ Evaluate the kind of regulations applicable on the
functioning of merchant banking in India.
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INTRODUCTION
HISTORY AND GROWTH OF MERCHANT
BANKING
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“A merchant bank is an organization that underwrites securities
for corporations, advises such clients on mergers and is involved
in ownership of commercial ventures. These organizations are
sometimes banks which are not merchants and sometimes
houses which are neither merchants nor banks”
—Random House Dictionary
“Merchant banking is the development of banking from
commerce which frequently encountered a prolonged
intermediate stage known in England originally as merchant
banking”
—Charles P Kindleberger
“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 managers consultant, advisor or rendering
corporate advisory services in relation to such issue
management”
—SEBI (Merchant Bankers) Rules 1992
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Services
Income
Fund Generation
Set Up
Customers
Scope
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Application for Grant of Certificate
Application to Conform to the Requirements
Furnishing of Information, Clarification, and
Personal Representation
Consideration of Application
Capital Adequacy Requirement
Procedure for Registration
Renewal of Certificate
Conditions of Registration
Period of Validity of Certificate
Procedure where Registration is not Granted
Effect of Refusal to Grant Certificate
Payment of Fees and the Consequences of Failure
to Pay Fee
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Code of Conduct for Merchant Bankers
Lead Merchant Banker Not to Associate With a
Merchant Banker Without Registration
Disclosures to the Board
Appointment of Compliance Officer
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In United Kingdom, the merchant bankers came into existence in 19th
century and the Baring Bank is known as the oldest merchant bank.
The merchant banking in India was formally introduced by the National
and Grindlays Bank which was known as Grindlays Bank in 1967.
A merchant banker is one who can be in the form of a bank or company
or firm or even a proprietary concern, which works as an intermediary
between a company (by assisting it to raise funds) and investor (by
assisting him/her in channelizing savings), or takes charge of various
functions and activities related to pre-issue management and post-issue
management, or underwrites the securities of a company and provides
necessary advice to its clients, or perform all these activities.
The scope and functions of merchant banks include, Corporate
Counseling, Capital Restructuring, Credit Syndication and Project
Finance, Fixed Deposit Banking, Foreign Currency Finance, Issue
Management and Underwriting, Lease Financing, ergers, Amalgamations
and Takeovers, Pre-investment studies, Portfolio Management, Project
Appraisal, Project Counseling, Working Capital Finance, Venture Capital
and Other Services, etc.
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There is a difference between a merchant bank and a
commercial bank. Commercial banks, basically, provide
loans to individuals, small businesses. The primary
function of a merchant bank is issue management of
their corporate clients. It also provides other services
like project appraisal, factoring, bills discounting and
other advisory services related to foreign investment,
joint venture, mergers and takeovers.
Security Exchange Board of India (Merchant Bankers)
Regulations, 1992 provides regulations for merchant
banks in India in detail.
SEBI (Merchant Bankers) regulations contain five
Chapters and these are Chapter I – Preliminary, Chapter
II – Registration of Merchant Bankers, Chapter III –
General Obligations and Responsibilities, Chapter IV –
Procedure for Inspection and Chapter V – Procedure for
Action in Case of Default.
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