CHAPTER 1
The Objective of the Study is as follows:
• To understand the need and the role played by Merchant banks.
• To understand the functioning of Merchant Banks.
Limitatios of the !"oject:
As the scope of Merchant Banking is extremely vast, I have covered a
few important points such as oncept of Merchant Banking, !eed, Importance
and "ole of Merchant Banking, #ualities of a good Merchant Banker, $ome of
the $ervices provided by Merchant Banks, %rganisational setup of Merchant
Bankers in India
CHAPTER #
1
Resea"ch $ethodolo%y
Collectio of &ata
&or the purpose of my study I have collected the relevant data keeping in mind
the aim of my research. I have collected the data from different sources namely
primary and secondary sources.
P"ima"y &ata
The primary data related to the study was collected from'
? Books
? (ebsites
Secoda"y &ata
Besides primary data, I have also collected the secondary data. And the
secondary data was collected from my pro)ect guide and some senior students.
2
CHAPTER '
Coce!t of me"chat ba(i%
The dictionary meaning of merchant bank refers to an organi*ation that
underwrites corporate securities and advises such clients on issues like
corporate mergers, etc. involved in the ownership of commercial ventures. This
organi*ation may be a bank, corporate body, firm or proprietary concern.
The $ecurities and +xchange Board of India has defined merchant banks 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 service in relation
to such issue management-.
In Indian context this definition suits well. Merchant banking in India started with
the management of public issues and loan syndication and has been slowly and
gradually covering activities like pro)ect counselling, portfolio management,
investment counselling and mergers and amalgamation of the corporate firms.
Although, merchant banking organi*ations present a long list of services they
contemplate to render to their clients but the main services so far being
rendered by them are those as authori*ed by the $+BI.
3
CHAPTER )
Histo"y of $e"chat *a(i%
O"i%i of me"chat ba(i%
The origin of merchant banking can be traced back to the ./
th
century
when the development of international trade and finance took place. The early
merchant bankers were traders of commodities. These bankers also acted as
bankers to the kings of +uropean $tates and financed continental wars and
coastal trades. The earlier merchant bankers used to lend their name to the
lesser known traders by accepting bills through which they guaranteed that the
holder of the bill would receive full value on the date of payment. 0ence the
name merchant was used because of its roots in merchant trade.
The %"owth of me"chat ba(i% i +dia
&ormal merchant activity in India was originated in .121 with the
merchant banking division setup by the 3rindlays Bank, the largest foreign bank
in the country. The main service offered at that time to the corporate enterprises
by the merchant banks included the management of public issues and some
aspects of financial consultancy. &ollowing 3rindlays Bank, itibank set up its
merchant banking division in .145.The division took up the task of assisting
new entrepreneurs and existing units in the evaluation of new pro)ects and
raising funds through borrowing and e6uity issues. Management consultancy
services were also offered. Merchant bankers are permitted to carry on
activities of primary dealers in government securities. onse6uent to the
recommendations of Banking ommission in .147, that Indian banks should
offer merchant banking services as part of the multiple services they could
4
provide their clients, $tate Bank of India started the Merchant Banking 8ivision
in .147. In the initial years the $BI9s ob)ective was to render corporate advice
and assistance to small and medium entrepreneurs.
The commercial banks that followed $tate Bank of India were entral
Bank of India, Bank of India and $yndicate Bank in .144.Bank of Baroda,
$tandard hartered Bank and Mercantile Bank in .14: and ;nited Bank of
India, ;nited ommercial Bank, .1:2? and
I8BI >.11.?.
5
CHAPTER ,
+m!o"tace- .eed ad Role of $e"chat *a(e"s
Important reason for the growth of merchant banking has been
developmental activity throughout the country, exerting excess demand on the
sources of funds for ever expanding industry and trade thus, leaving a widening
gap unbridged between the supply and demand of inventible funds. All Indian
financial institutions and experienced resources constraint to meet the ever
increasing demands for funds from the corporate sector enterprises. In the
circumstances corporate sector had the only alternative to avail of the capital
market services for meeting their long@term financial re6uirements through
capital issues of e6uity and debentures. (ith the growing demand for funds
there was pressure on capital market that enthused the commercial banks,
share brokers and financial consultant firms to enter into the field of merchant
banking and share the growing capital markets. (ith the result, all the
commercial banks in nationali*ed and public sector as well as in private sector
including the foreign banks in India have opened their merchant banking
windows and are competing in this field. There has been a mushroom growth of
financial consultancy firms and broker firms doing advisory functions as well as
managing public issues in syndication with other merchant bankers.
!otwithstanding the above facts, the need of merchant banking
institutions is felt in the wake of huge public savings lying still untapped.
Merchant banks can play highly significant role in mobili*ing funds of savers to
investible channels assuring promising return on investments and thus can help
in meeting the widening demand for investible funds for economic activity. (ith
the growth of merchant banking profession corporate enterprises in both public
and private sectors would be able to raise re6uired amount of funds annually
from the capital market to meet the growing re6uirements for funds for
6
establishing new enterprises, undertaking expansion or moderni*ation or
diversification of the existing enterprises. This reinforces the need for a vigorous
role to be played by merchant banks.
Merchant banks have been procuring impressive support from capital
market for the corporate sector for financing their pro)ects. This is evidenced
from the increasing amount raised form the capital market by the corporate
enterprises year after year.
Merchant bankers, with their skills, updated information and knowledge,
provide service to the corporate units and advise them on such re6uirements to
be complied with for raising funds from the capital market under different
enactments vi*. ompanies Act, Income@tax Act, &oreign +xchange "egulation
Act, $ecurities ontracts >"egulation? Act and various other corporate laws and
regulations.
Merchant bankers advise the investors of the incentives available in the
form of tax reliefs, other statutory relaxations, and good return on investment
and capital appreciation in such investment to motivate them to invest their
savings in securities of the corporate sector. Thus, the merchant bankers help
the industry and trade to raise funds and the investors to invest their saved
money in sound and healthy concerns with confidence, safety and expectation
for higher yields.
Role of $e"chat *a(e"
The role of merchant banker is dynamic in the wake of diverse nature of
merchant banking services. Merchant banker9s dynamism lies in promptly
attending to the corporate problems and suggests ways and means to solve it.
The nature of merchant banking services is development oriented and
promotional to help the industry and trade to grow and survive.
7
? 0e is always awake to renew his skills, develop expertise in new areas
so as to e6uip himself with the knowledge and techni6ues to deal with
emerging new problems of corporate business world.
? 0e has to keep pace with the changing environment where government
rules, regulations and politics affecting business conditions fre6uently
changeA where science and technology create new innovations in
production processes of industries.
? Merchant banker has to think and devise new instruments of financing
industrial pro)ects.
? 0e has to assume wider responsibilities of saving industrial units from
going sick and guiding industries to be setup in industrially backward
areas to eliminate regional imbalances in industrial development of the
country.
? 0e has to guide the wider section of the community possessing surplus
money to invest in corporate securities and other productive investment
channels.
? 0e has to help the industry in different forms to ensure that it runs risk
free and devoid of uncertainty by assisting the promoters with his
knowledge and skills to resolve the problems being faced by them.
? 0e has to watch the interest and win over the confidence of the
government, its agencies, along with the entrepreneurs, the investors
and the whole community.
? 0e must bridge the communication gap between different sections and
resolve the problem being faced in different areas concerned with the
business world.
8
In the days ahead, merchant bankers have very significant role to play
tuning their activities to the re6uirements of the growth pattern of the corporate
sector, the industry and the economy as a whole which is, in itself, a
challenging task and to meet these challenges merchant bankers will have to
be more vigorous and strategic in playing their role. They will have also to adopt
new ways and means in discharging their role.
9
CHAPTER /
$e"chat *a(i%: Objectives
Merchant Banker plays a vital role in the economic and financial
development of the country. As a result of economic and financial liberali*ation
new companies are formed and number of issues floated to raise resources
from the investor community. onsidering the significance of the issue the
3overnment of India instituted $+BI in .115 to regulate and control various
market intermediaries. $+BI issued various rules and regulations for each and
every segment of the capital market. To regulate Merchant bankers, with the
twin ob)ective vi*., investor protection and development of the capital market,
$+BI issued rules and regulations for Merchant Bankers. $ubse6uent
amendments also have been made to these regulations to further strengthen
this segment of the securities industry. These regulations >Merchant Banking?
specified that every company desires to float an issue to the public should
engage Merchant Banker >"egistered under these regulations with $+BI? as
Bead Manager. In this context Merchant Banker gained the importance in the
Indian $ecurities Industry. In the wake of economic reforms and financial
liberali*ation the need for financial resources has significantly increased. As an
intermediary@Merchant Banker plays a crucial role in exploring the ways and
means for the funds. Besides, issue management, Merchant Banker also
performs several other important functions like underwriting of securities,
Merchant Bankers? "egulation. The issuer
25
company is also re6uired to enter into a formal agreement with the lead
merchant banker as per the re6uirement of the regulation.
2'3 .umbe" of co8maa%e"s to the issue 7 The number of lead merchant
bankers should not exceed in case of any of the following issues'
Si1e of the !ublic issue
2Rs6 i c"o"es3
.umbe" of Lead $e"chat *a(e"s
Bess than "s.E5 crores Two
"s.E5 crores but less than "s.55
crores
Three
"s..55 crores but less than
"s.755 crores
&our
"s.755 crores but less than
"s.G55 crores
&ive
"s.G55 crores and above &ive or more as may be agreed by
the $+BI
2++3 Ste!s to be ta(e by lead maa%e" to the !ublic issue fo" ew
com!aies- "i%hts issue o" dilutio sha"es fo" eAisti% com!aies 7 %nce
the company has appointed lead manager to the public issue, its executives
work in close coordination with the lead merchant banker. In case, there is more
than one lead manager, the role to be played by each of the lead managers is
discussed and the work relating to issue management could be allocated
amongst them keeping in view their respective expertise and resourcefulness in
26
the specific area. $uch merchant banker will be responsible and accountable
for all matters related to the specified and accepted roles. Bead merchant
bankerDs hasDhave to plan the public issue activities through a schedule listing
the activities to be performed and the time@frame within which each activity has
to be performed and completed. A specimen activity schedule which is
generally prepared by lead managers to the issue is given as check@list. The
ma)or activities to be performed by the merchant bankers are as follows'
16 Stoc( eAcha%e a!!"oval6
#6 Coside"atios "e%a"di% the ade9uacy of ca!ital- balaced ca!ital
st"uctu"e- debt8e9uity "atio ad !"efe"ece e9uity "atio6
'6 Ta(i% actio as !e" SE*+ %uidelies 7 "e6uirements for capital
issues under the $+BI guidelines are listed below'
a3 &resh issue of capital to public' e6uity shares and preference
shares.
b3 "ights issueDpublic issue by existing listed companies.
c3 Bonus issue.
d3 8ebenture issue.
e3 atch o defaulti% ude"w"ite"s 7 In
order to keep a close watch over such underwriters who have failed to
meet their underwriting devolvement and to consider penal action
against such underwriters and debar them from underwriting public
issues in future, the merchant bankers are re6uired to provide
information to $+BI in the below given format beginning from Kuly, .11/'
? !ame of the merchant banker
? !ame of the issuer company
? Issue si*e
1'6 *"id%e loa f"om istitutioal ude"w"ite"s a%aist !ublic issue of
sha"es 7 &inancial institutions provide bridge loan to the company to the
extent of E5H of their underwriting commitments which has demand
character, to be ad)usted on allotment. To avail of the amount of bridge
loan the company has got to notify in the prospectus its intentions.
1)6 &evolvemet ad commitmet of ude"w"ite"s 7 Institutional
underwriters including banks should be immediately contracted by the
company through its Mangers to put in the application to the extent of
devolvement. The underwriter Banks should be approached in writing
with the following documents enclosed.
36
? Auditors ertificate showing that the promoters and their
associates have contributed their share of contribution in the
e6uity capital of the company in terms of the prospectus.
? Auditors9 ertificate explaining that the obligation of underwriters
in respect of contingent underwriting have been duly fulfilled by
the underwriters.
? $tatement of underwriters obligations showing therein the extent
of devolvement upon institutionsDbanks, which has also got to be
verified by the auditors.
37
@de"w"iti%
$eai%
The word =underwriting9 was coined by British Merchants who used to write their
names at the end of marine insurance document wherein each agreed to
assure )oint risk.
The dictionary meaning of underwriting is =to agree to sell bonds, etc. to the
public, or to furnish the necessary money for such securities and to buy those
which cannot be sold9.
;nderwriting is an important primary market activity performed by stock
brokers, merchant bankers and underwriters approved by $+BI for this
purpose. It is related to marketing and merchant banking for an issue. The
industry positions are measured by the amount of underwriting one does.
;nderwriters are distributors for the financial products@ assuring a sale and if
the sale does not actually take place, they agree to pick up the residual. It is an
assurance against the possible failure of the issue and the underwriters have to
step in if the issue remains under subscribed to the extent of the amount
underwritten. If the market does not take the share, it is an indication of
overpricing of scrip. As such, the underwriter exposes himself to risk on account
of fall in market price and blockening his funds.
;nderwriting offer is similar to insurance business, where the insurer is exposed
to risk to the extent of amount insured, but the only game is the insurance
commission. In underwriting, the compensation is underwriting commission.
The underwriting decision is evaluation of risk and probable loss which can also
be reduced by sub@underwriting.
38
In India underwriting commission is regulated by statute at a maximum of 7.EH.
$imilarly, the entry into this business is also regulated by $+BI thereby only
$+BI registered agencies can act as underwriters. These are'@
.. ategory .,7 C / Merchant bankers.
7. ;nderwriters.
/. $tockbrokers.
@de"w"iti% ad SE*+ %uidelies
According to $+BI guidelines on investor protection and disclosure dated
..D52D.117, underwriting was mandatory for the full issue amount for each
issue of capital to the public. This has since been relaxed in view of high costs
involved and now the underwriting is optional.
The lead managers are re6uired to satisfy themselves that the financial of the
underwriters are ade6uate for them to undertake their underwriting
commitmentsA such opinion has to be included in the prospectus also.
@de"w"iti% a%"eemet
To avoid disputes between the underwriters and Issuer ompany, $+BI has
formulated a model underwriting agreement which seeks to standardi*e the
legal relationship between the two parties. It provides clear guidelines for
resolving the issues of disputes. It stipulates several norms for interest of both
the parties including the time limit within which the issue should open from the
date of agreement i.e. three months.
The practice in our country is that lead managers obtain blank and undated
consents from the underwriters which the underwriters do in order to get the
39
business and there have been cases where the issues really came even after
one year of sending consents.
The underwriters shall be entitled to appoint sub@underwriters but the main
underwriter will be primarily responsible. The underwriters are also asked to
produce a statement of devolvement of issues and a statement of declaration of
net worth alongwith hartered Accountant9s ertificate at the time of sending
consents. All underwriters who are members of recogni*ed stock exchanges
have also to obtain permission to act as underwriter from their $tock +xchange.
;nderwriting agreement is a legally enforceable contract between a company or
an issuer and the underwriter. There is no legal difference between underwriting
and contingent underwriting as all underwritings are dependent on a
contingency. $ometimes, a company enters into a standby arrangement
whereby there is an agreement between the company and an undertaker who
agrees to apply for shares, if not subscribed by public. This is also an
underwriting agreement.
Evaluatio by ude"w"ite":
$ince the underwriter9s contingent stake is involved in any issue, it is desirable
for any underwriter to evaluate the pro)ect or issue before consenting to act as
an underwriter. 0e should stress upon following points while deciding whether
to underwrite and how much to underwrite.
16 ompany9s standing and past track record
#6 Management of the company, competence of promoters and
professional approach.
'6 %b)ects of the proposed issue.
)6 BI?
ii. ;nit Trust of India >;TI?
iii. 3eneral Insurance orporation of India >3I? and its subsidiary
companies.
)6 Comme"cial *a(s:88 ommercial banks )oin consortium financing with all
India financial institutions to provide medium term loan to industrial pro)ects,
otherwise they cater to the needs for working capital re6uirements.
,6 $utual ;uds
/6 =etu"e Ca!ital ;uds
45
P"oject Couselli%
The Objective of the Study is as follows:
• To understand the need and the role played by Merchant banks.
• To understand the functioning of Merchant Banks.
Limitatios of the !"oject:
As the scope of Merchant Banking is extremely vast, I have covered a
few important points such as oncept of Merchant Banking, !eed, Importance
and "ole of Merchant Banking, #ualities of a good Merchant Banker, $ome of
the $ervices provided by Merchant Banks, %rganisational setup of Merchant
Bankers in India
CHAPTER #
1
Resea"ch $ethodolo%y
Collectio of &ata
&or the purpose of my study I have collected the relevant data keeping in mind
the aim of my research. I have collected the data from different sources namely
primary and secondary sources.
P"ima"y &ata
The primary data related to the study was collected from'
? Books
? (ebsites
Secoda"y &ata
Besides primary data, I have also collected the secondary data. And the
secondary data was collected from my pro)ect guide and some senior students.
2
CHAPTER '
Coce!t of me"chat ba(i%
The dictionary meaning of merchant bank refers to an organi*ation that
underwrites corporate securities and advises such clients on issues like
corporate mergers, etc. involved in the ownership of commercial ventures. This
organi*ation may be a bank, corporate body, firm or proprietary concern.
The $ecurities and +xchange Board of India has defined merchant banks 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 service in relation
to such issue management-.
In Indian context this definition suits well. Merchant banking in India started with
the management of public issues and loan syndication and has been slowly and
gradually covering activities like pro)ect counselling, portfolio management,
investment counselling and mergers and amalgamation of the corporate firms.
Although, merchant banking organi*ations present a long list of services they
contemplate to render to their clients but the main services so far being
rendered by them are those as authori*ed by the $+BI.
3
CHAPTER )
Histo"y of $e"chat *a(i%
O"i%i of me"chat ba(i%
The origin of merchant banking can be traced back to the ./
th
century
when the development of international trade and finance took place. The early
merchant bankers were traders of commodities. These bankers also acted as
bankers to the kings of +uropean $tates and financed continental wars and
coastal trades. The earlier merchant bankers used to lend their name to the
lesser known traders by accepting bills through which they guaranteed that the
holder of the bill would receive full value on the date of payment. 0ence the
name merchant was used because of its roots in merchant trade.
The %"owth of me"chat ba(i% i +dia
&ormal merchant activity in India was originated in .121 with the
merchant banking division setup by the 3rindlays Bank, the largest foreign bank
in the country. The main service offered at that time to the corporate enterprises
by the merchant banks included the management of public issues and some
aspects of financial consultancy. &ollowing 3rindlays Bank, itibank set up its
merchant banking division in .145.The division took up the task of assisting
new entrepreneurs and existing units in the evaluation of new pro)ects and
raising funds through borrowing and e6uity issues. Management consultancy
services were also offered. Merchant bankers are permitted to carry on
activities of primary dealers in government securities. onse6uent to the
recommendations of Banking ommission in .147, that Indian banks should
offer merchant banking services as part of the multiple services they could
4
provide their clients, $tate Bank of India started the Merchant Banking 8ivision
in .147. In the initial years the $BI9s ob)ective was to render corporate advice
and assistance to small and medium entrepreneurs.
The commercial banks that followed $tate Bank of India were entral
Bank of India, Bank of India and $yndicate Bank in .144.Bank of Baroda,
$tandard hartered Bank and Mercantile Bank in .14: and ;nited Bank of
India, ;nited ommercial Bank, .1:2? and
I8BI >.11.?.
5
CHAPTER ,
+m!o"tace- .eed ad Role of $e"chat *a(e"s
Important reason for the growth of merchant banking has been
developmental activity throughout the country, exerting excess demand on the
sources of funds for ever expanding industry and trade thus, leaving a widening
gap unbridged between the supply and demand of inventible funds. All Indian
financial institutions and experienced resources constraint to meet the ever
increasing demands for funds from the corporate sector enterprises. In the
circumstances corporate sector had the only alternative to avail of the capital
market services for meeting their long@term financial re6uirements through
capital issues of e6uity and debentures. (ith the growing demand for funds
there was pressure on capital market that enthused the commercial banks,
share brokers and financial consultant firms to enter into the field of merchant
banking and share the growing capital markets. (ith the result, all the
commercial banks in nationali*ed and public sector as well as in private sector
including the foreign banks in India have opened their merchant banking
windows and are competing in this field. There has been a mushroom growth of
financial consultancy firms and broker firms doing advisory functions as well as
managing public issues in syndication with other merchant bankers.
!otwithstanding the above facts, the need of merchant banking
institutions is felt in the wake of huge public savings lying still untapped.
Merchant banks can play highly significant role in mobili*ing funds of savers to
investible channels assuring promising return on investments and thus can help
in meeting the widening demand for investible funds for economic activity. (ith
the growth of merchant banking profession corporate enterprises in both public
and private sectors would be able to raise re6uired amount of funds annually
from the capital market to meet the growing re6uirements for funds for
6
establishing new enterprises, undertaking expansion or moderni*ation or
diversification of the existing enterprises. This reinforces the need for a vigorous
role to be played by merchant banks.
Merchant banks have been procuring impressive support from capital
market for the corporate sector for financing their pro)ects. This is evidenced
from the increasing amount raised form the capital market by the corporate
enterprises year after year.
Merchant bankers, with their skills, updated information and knowledge,
provide service to the corporate units and advise them on such re6uirements to
be complied with for raising funds from the capital market under different
enactments vi*. ompanies Act, Income@tax Act, &oreign +xchange "egulation
Act, $ecurities ontracts >"egulation? Act and various other corporate laws and
regulations.
Merchant bankers advise the investors of the incentives available in the
form of tax reliefs, other statutory relaxations, and good return on investment
and capital appreciation in such investment to motivate them to invest their
savings in securities of the corporate sector. Thus, the merchant bankers help
the industry and trade to raise funds and the investors to invest their saved
money in sound and healthy concerns with confidence, safety and expectation
for higher yields.
Role of $e"chat *a(e"
The role of merchant banker is dynamic in the wake of diverse nature of
merchant banking services. Merchant banker9s dynamism lies in promptly
attending to the corporate problems and suggests ways and means to solve it.
The nature of merchant banking services is development oriented and
promotional to help the industry and trade to grow and survive.
7
? 0e is always awake to renew his skills, develop expertise in new areas
so as to e6uip himself with the knowledge and techni6ues to deal with
emerging new problems of corporate business world.
? 0e has to keep pace with the changing environment where government
rules, regulations and politics affecting business conditions fre6uently
changeA where science and technology create new innovations in
production processes of industries.
? Merchant banker has to think and devise new instruments of financing
industrial pro)ects.
? 0e has to assume wider responsibilities of saving industrial units from
going sick and guiding industries to be setup in industrially backward
areas to eliminate regional imbalances in industrial development of the
country.
? 0e has to guide the wider section of the community possessing surplus
money to invest in corporate securities and other productive investment
channels.
? 0e has to help the industry in different forms to ensure that it runs risk
free and devoid of uncertainty by assisting the promoters with his
knowledge and skills to resolve the problems being faced by them.
? 0e has to watch the interest and win over the confidence of the
government, its agencies, along with the entrepreneurs, the investors
and the whole community.
? 0e must bridge the communication gap between different sections and
resolve the problem being faced in different areas concerned with the
business world.
8
In the days ahead, merchant bankers have very significant role to play
tuning their activities to the re6uirements of the growth pattern of the corporate
sector, the industry and the economy as a whole which is, in itself, a
challenging task and to meet these challenges merchant bankers will have to
be more vigorous and strategic in playing their role. They will have also to adopt
new ways and means in discharging their role.
9
CHAPTER /
$e"chat *a(i%: Objectives
Merchant Banker plays a vital role in the economic and financial
development of the country. As a result of economic and financial liberali*ation
new companies are formed and number of issues floated to raise resources
from the investor community. onsidering the significance of the issue the
3overnment of India instituted $+BI in .115 to regulate and control various
market intermediaries. $+BI issued various rules and regulations for each and
every segment of the capital market. To regulate Merchant bankers, with the
twin ob)ective vi*., investor protection and development of the capital market,
$+BI issued rules and regulations for Merchant Bankers. $ubse6uent
amendments also have been made to these regulations to further strengthen
this segment of the securities industry. These regulations >Merchant Banking?
specified that every company desires to float an issue to the public should
engage Merchant Banker >"egistered under these regulations with $+BI? as
Bead Manager. In this context Merchant Banker gained the importance in the
Indian $ecurities Industry. In the wake of economic reforms and financial
liberali*ation the need for financial resources has significantly increased. As an
intermediary@Merchant Banker plays a crucial role in exploring the ways and
means for the funds. Besides, issue management, Merchant Banker also
performs several other important functions like underwriting of securities,
Merchant Bankers? "egulation. The issuer
25
company is also re6uired to enter into a formal agreement with the lead
merchant banker as per the re6uirement of the regulation.
2'3 .umbe" of co8maa%e"s to the issue 7 The number of lead merchant
bankers should not exceed in case of any of the following issues'
Si1e of the !ublic issue
2Rs6 i c"o"es3
.umbe" of Lead $e"chat *a(e"s
Bess than "s.E5 crores Two
"s.E5 crores but less than "s.55
crores
Three
"s..55 crores but less than
"s.755 crores
&our
"s.755 crores but less than
"s.G55 crores
&ive
"s.G55 crores and above &ive or more as may be agreed by
the $+BI
2++3 Ste!s to be ta(e by lead maa%e" to the !ublic issue fo" ew
com!aies- "i%hts issue o" dilutio sha"es fo" eAisti% com!aies 7 %nce
the company has appointed lead manager to the public issue, its executives
work in close coordination with the lead merchant banker. In case, there is more
than one lead manager, the role to be played by each of the lead managers is
discussed and the work relating to issue management could be allocated
amongst them keeping in view their respective expertise and resourcefulness in
26
the specific area. $uch merchant banker will be responsible and accountable
for all matters related to the specified and accepted roles. Bead merchant
bankerDs hasDhave to plan the public issue activities through a schedule listing
the activities to be performed and the time@frame within which each activity has
to be performed and completed. A specimen activity schedule which is
generally prepared by lead managers to the issue is given as check@list. The
ma)or activities to be performed by the merchant bankers are as follows'
16 Stoc( eAcha%e a!!"oval6
#6 Coside"atios "e%a"di% the ade9uacy of ca!ital- balaced ca!ital
st"uctu"e- debt8e9uity "atio ad !"efe"ece e9uity "atio6
'6 Ta(i% actio as !e" SE*+ %uidelies 7 "e6uirements for capital
issues under the $+BI guidelines are listed below'
a3 &resh issue of capital to public' e6uity shares and preference
shares.
b3 "ights issueDpublic issue by existing listed companies.
c3 Bonus issue.
d3 8ebenture issue.
e3 atch o defaulti% ude"w"ite"s 7 In
order to keep a close watch over such underwriters who have failed to
meet their underwriting devolvement and to consider penal action
against such underwriters and debar them from underwriting public
issues in future, the merchant bankers are re6uired to provide
information to $+BI in the below given format beginning from Kuly, .11/'
? !ame of the merchant banker
? !ame of the issuer company
? Issue si*e
1'6 *"id%e loa f"om istitutioal ude"w"ite"s a%aist !ublic issue of
sha"es 7 &inancial institutions provide bridge loan to the company to the
extent of E5H of their underwriting commitments which has demand
character, to be ad)usted on allotment. To avail of the amount of bridge
loan the company has got to notify in the prospectus its intentions.
1)6 &evolvemet ad commitmet of ude"w"ite"s 7 Institutional
underwriters including banks should be immediately contracted by the
company through its Mangers to put in the application to the extent of
devolvement. The underwriter Banks should be approached in writing
with the following documents enclosed.
36
? Auditors ertificate showing that the promoters and their
associates have contributed their share of contribution in the
e6uity capital of the company in terms of the prospectus.
? Auditors9 ertificate explaining that the obligation of underwriters
in respect of contingent underwriting have been duly fulfilled by
the underwriters.
? $tatement of underwriters obligations showing therein the extent
of devolvement upon institutionsDbanks, which has also got to be
verified by the auditors.
37
@de"w"iti%
$eai%
The word =underwriting9 was coined by British Merchants who used to write their
names at the end of marine insurance document wherein each agreed to
assure )oint risk.
The dictionary meaning of underwriting is =to agree to sell bonds, etc. to the
public, or to furnish the necessary money for such securities and to buy those
which cannot be sold9.
;nderwriting is an important primary market activity performed by stock
brokers, merchant bankers and underwriters approved by $+BI for this
purpose. It is related to marketing and merchant banking for an issue. The
industry positions are measured by the amount of underwriting one does.
;nderwriters are distributors for the financial products@ assuring a sale and if
the sale does not actually take place, they agree to pick up the residual. It is an
assurance against the possible failure of the issue and the underwriters have to
step in if the issue remains under subscribed to the extent of the amount
underwritten. If the market does not take the share, it is an indication of
overpricing of scrip. As such, the underwriter exposes himself to risk on account
of fall in market price and blockening his funds.
;nderwriting offer is similar to insurance business, where the insurer is exposed
to risk to the extent of amount insured, but the only game is the insurance
commission. In underwriting, the compensation is underwriting commission.
The underwriting decision is evaluation of risk and probable loss which can also
be reduced by sub@underwriting.
38
In India underwriting commission is regulated by statute at a maximum of 7.EH.
$imilarly, the entry into this business is also regulated by $+BI thereby only
$+BI registered agencies can act as underwriters. These are'@
.. ategory .,7 C / Merchant bankers.
7. ;nderwriters.
/. $tockbrokers.
@de"w"iti% ad SE*+ %uidelies
According to $+BI guidelines on investor protection and disclosure dated
..D52D.117, underwriting was mandatory for the full issue amount for each
issue of capital to the public. This has since been relaxed in view of high costs
involved and now the underwriting is optional.
The lead managers are re6uired to satisfy themselves that the financial of the
underwriters are ade6uate for them to undertake their underwriting
commitmentsA such opinion has to be included in the prospectus also.
@de"w"iti% a%"eemet
To avoid disputes between the underwriters and Issuer ompany, $+BI has
formulated a model underwriting agreement which seeks to standardi*e the
legal relationship between the two parties. It provides clear guidelines for
resolving the issues of disputes. It stipulates several norms for interest of both
the parties including the time limit within which the issue should open from the
date of agreement i.e. three months.
The practice in our country is that lead managers obtain blank and undated
consents from the underwriters which the underwriters do in order to get the
39
business and there have been cases where the issues really came even after
one year of sending consents.
The underwriters shall be entitled to appoint sub@underwriters but the main
underwriter will be primarily responsible. The underwriters are also asked to
produce a statement of devolvement of issues and a statement of declaration of
net worth alongwith hartered Accountant9s ertificate at the time of sending
consents. All underwriters who are members of recogni*ed stock exchanges
have also to obtain permission to act as underwriter from their $tock +xchange.
;nderwriting agreement is a legally enforceable contract between a company or
an issuer and the underwriter. There is no legal difference between underwriting
and contingent underwriting as all underwritings are dependent on a
contingency. $ometimes, a company enters into a standby arrangement
whereby there is an agreement between the company and an undertaker who
agrees to apply for shares, if not subscribed by public. This is also an
underwriting agreement.
Evaluatio by ude"w"ite":
$ince the underwriter9s contingent stake is involved in any issue, it is desirable
for any underwriter to evaluate the pro)ect or issue before consenting to act as
an underwriter. 0e should stress upon following points while deciding whether
to underwrite and how much to underwrite.
16 ompany9s standing and past track record
#6 Management of the company, competence of promoters and
professional approach.
'6 %b)ects of the proposed issue.
)6 BI?
ii. ;nit Trust of India >;TI?
iii. 3eneral Insurance orporation of India >3I? and its subsidiary
companies.
)6 Comme"cial *a(s:88 ommercial banks )oin consortium financing with all
India financial institutions to provide medium term loan to industrial pro)ects,
otherwise they cater to the needs for working capital re6uirements.
,6 $utual ;uds
/6 =etu"e Ca!ital ;uds
45
P"oject Couselli%