Merchant Banking

MERCHANT BANKING Merchant Banking is a business of issue management either by making arrangements regarding selling, buying or subscribing to securities, or rendering corporate advisory service in relation to such issue management.

Merchant Banking in India 

Merchant banking activity was formally initiated into the Indian capital markets when Grind lays bank received the license from RBI in 1967.

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Following Grind lays bank, CITI bank set up its Merchant Banking division in 1970.

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State Bank of India started its MB division on 1972.

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Bank of India and Syndicate Bank in 1977.

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Bank of Baroda , Standard Chartered Bank and Mercantile Bank in 1978.

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United Commercial Bank , Punjab national Bank, Canara Bank and Indian Overseas

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Bank in late 70’s and early 80’s.

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ICICI started MB in 1973,

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IFCI in 1986, and

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IDBI in 1991.

Nature of Merchant Banking Merchant Banking is a skilled-based activity and involved servicing any financial need of the client. It requires a focused skill base to provide for the requirements of a client. SEBI has made the quality of manpower as one of the criteria for renewal of merchant banking registration.

Regulations of Merchant Banking  Notifications

of the Ministry of finance and

SEBI  Rationale of notification.  Objectives of the Merchant Bankers Regulations

CLASSIFICATION OF FINANCIAL MARKETS FINANCIAL MARKETS ORGANIZED

UNORGANIZED

Capital Market

Industrial Security mkt

Primary mkt

Govt. Securities market

Secondary mkt

Money Market Long term Loans market

Call money mkt

Term Loan Mkt for mkt mortgages

Commercial Treasury Short term Bill Bill Loan mkt mkt mkt

Mkt for Financial guarantees

Money lenders, Indigenous Bankers.etc,.

UNORGANIZED MARKETS In these markets there are a number of moneylenders, indigenous bankers, and traders etc who lend money to the public. Indigenous bankers also collect deposits from the public. Example: private finance companies, chit funds, whose activities are not controlled by the RBI.

ORGANIZED MARKETS In the organized markets, there are standardized rules and regulations governing their financial dealings. There is also a high degree of institutionalization and instrumentalization. These markets are subject to strict supervision and controlled by RBI or other regulatory bodies.  

Capital market Money market

CAPITAL MARKET The term capital market refers to the institutional arrangements for facilitating the borrowing and lending of long-term funds. The capital market is a market for financial assets, which have a long or indefinite maturity. Generally it deals with long-term securities, which have a maturity period of above one year. Capital market may be further divided in to three namely,   

Industrial securities market. Government securities market and Long-term loans market.

Industrial securities market As the very name implies, it is a market for industrial securities namely: Equity shares or Ordinary shares, Preference shares and, Debentures or Bonds. It is market where industrial concerns raise their capital or debt by issuing appropriate instruments. It can be further divided into,  Primary Market or New Issue Market.  Secondary Market or Stock Exchange

Primary Market or New Issue Market Primary Market is a market for new issues or new financial claims. Hence it is also called new issue market. The primary market deals with those securities, which are issued to the public for the first time. In the primary market, borrowers exchange new financial securities for long tern funds. Thus, primary market facilitates capital formation.

There are three ways by which the company may raise capital in a primary market. They are, Public Issue: The most common method of raising capital by new companies is through sale of securities to the public. Rights Issue: When an existing company wants to raise additional capital, securities are first offered to the existing shareholders on a pre-emptive basis. Private Placement: Is a way of selling securities privately to a small group of investors.

Secondary Market or Stock Exchange Secondary Market or Stock Exchange is a market for secondary sale of securities. In other words, securities that have already passed through new issue market or traded in this market. Generally, such securities are quoted in the stock exchange and it provides a continuous and regular market for buying and selling of securities.

Government securities market (Gilt edged securities market) It is market where government securities are traded. In India there are many types of government securities- short term and long term. Long-term securities are traded in this market while short-term securities are traded in the money market.

Securities issued by the central government, state govt., semi govt. authorities like city corporations, port trusts, improvement trusts, state electricity boards, all India and state level financial institutions and public sector enterprises are dealt in this market. The government securities are in many forms. These are generally:  Stock certificates  Promissory notes  Bearer bonds

Long-term loans market. Development banks and commercial banks play a significant role in this market by supplying long term loans to corporate customers. Long-term loans market may further be classified into;  Term loans market  Mortgages market  Financial guarantees market.

Term loans market In India, many industrial financing have been created by the govt. both at the national and regional levels to supply long term and medium term loans to corporate customers directly as well as indirectly. These development banks dominate the industrial finance in India. Institutions like IDBI, IFCI, ICICI, and other state financial corporations come under this category.

Mortgages market Mortgages market refers to those centre, which supply mortgage loan mainly to individual customers. A mortgage loan is a loan against the security of immovable property like real estate. The transfer of interest in specific immovable property to secure a loan is called a mortgage. This mortgage may be   

Equitable mortgage or legal one. First charge or second charge. Primary market or secondary market.

Financial guarantees market. A guarantee market is a centre where finance is provided against the guarantee of a reputed person in the financial circle. Guarantee is a contract to discharge the liability of a third party in case of his default. Though there are many types of guarantees the common forms are :  Performance guarantee, and  Financial guarantee.

FUNCTIONS OF CAPITAL MARKET Major functions performed by a capital market are,  Mobilizing of financial resources on a nation wide scale.  Securing the foreign capital and know how to fill up the deficit in the required resources for economic growth at a faster rate.  Effective allocation of the mobilized financial resources by directing the same to projects yielding highest yield or to the projects needed to promote balanced economic development.

LINKAGE BETWEEN MARKETS RELATIONSHIP BETWEEN EXCHANGE AND MONEY MARKETS RELATIONSHIP BETWEEN NEW ISSUE MARKET AND STOCK EXCHANGE

Differences Types of securities dealt Nature of financing Organization Similarities New vs Old Securities Control Economic Interdependence