Blackbook Project On Merchant Banking 1
Blackbook Project On Merchant Banking 1
Bachelor of Commerce
Banking & Insurance
Semester v
Submitted By
HEBTULLAH KAPADIA
Seat No:
MERCHANT BANKING
BACHELOR OF COMMERCE
BANKING & INSURANCE
SEMESTER V
SUBMITTED BY
HEBTULLAH KAPADIA
SEAT NO.
DECLARATION
HEBTULLAH KAPADIA
SEAT NO:
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MERCHANT BANKING
BACHELOR OF COMMERCE
BANKING & INSURANCE
SEMESTER V
SUBMITTED
IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE AWARD OF DEGREE OF
BACHELOR OF COMMERCE
BANKING & INSURANCE
BY
HEBTULLAH KAPADIA
SEAT NO:
CERTIFICATE
Course Co-ordinator
Principal
Internal Examiner
External Examiner
College Seal
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ACKNOWLEDGEMENT
I owe a great many thanks to a great many people who helped and supported me
during the writing of this book.
My deepest thanks to Lecturer, Adarsh Suri the Guide of the project for guiding
and correcting various documents of mine with attention and care. She has taken
pain to go through the project and make necessary correction as and when needed.
My deep sense of gratitude to Mr. Amit Bansod, Chief Syndicated Loan Manager,
SBI CAPITAL MARKETS LIMITED support and guidance. Thanks and
appreciation to the helpful people at SBI CAPITAL MARKETS LIMITED for
their support.
I would also thank my Institution and my faculty members without whom this
project would have been a distant reality. I also extend my heartfelt thanks to my
family and well wishers.
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INDEX
Sr.
.
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
S
EXECUTIVE SUMMARY
INTRODUCTION
HISTORY OF MERCHANT ANKING
TRADATIONAL MERCHANT ANKING
MODERN MERCHANT ANKING
MAIN OBJECTIVES OF MERCHANT BANKERS
SCOPE FOR GROWTH OF MERCHANT
BANKING IN INDIA
MERCHANT BANKING IN INDIA
DEVELOPMENTS IN MERCHANT BANKING
ESTABLISHMENTS IN INDIA
ROLE OF MERCHANT BANKER
REQUIREMENTS FOR SETTING UP A
MERCHANT BANKING OUTFIT
GUIDELINES OF SEBI
INVESTMENT BANKS V/S MERCHANT BANKS
MERCHANT BANKS V/S COMMERCIAL BANK
FUNCTIONS OF MERCHANT BANKERS
PROBLEMS OF MERCHANT BANKING
CASE STUDIES
ANALYSIS AND INTERPRETATION
CONCLUSION
BIBLIOGRAPHY
ANNEXURE QUESTIONAIRE
PAGE
No.
1
2
3
5
6
8
9
12
14
16
17
21
23
23
24
30
32
37
47
48
49
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EXECUTIVE SUMMARY
Merchant Banking is an important service provided by a number of financial
institutions that helps in the growth of the corporate sector which ultimately
reflects into the overall economic development of the country. Merchant banks
were expected to perform several functions like issue management, underwriting,
portfolio management, loan syndication, consultant, advisor and host of other
activities. SEBI was also made all powerful to regulate the activities of merchant
banks in the best interest of investors and economy. Apart, merchant banking was
the necessity of banks themselves which were in need of non-fund based income so
as to improve their profitability margins by all means in the changed economic
scenario. Now, it could be anybody's anxiety to know whether merchant banks are
performing their duties honestly as they were expected to do. What duties they
performs most and in what capacity. Whether merchant banking business helped
banks themselves to improve their overall profitability. Does the socio, political
and economic environment prevailing today sufficiently warrant, the growth of
merchant banking or otherwise? An honest attempt is being made to seek answer
of these questions and also to suggest remedial measures wherever possible on the
basis of empirical study done.
HYPOTHESIS
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INTRODUCTION
The merchant banking has been defined as to what a merchant banker does. A
merchant Banker has been defined by Securities Exchange Board Of India
(Merchant Banker) rules, 1992, 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 manager, consultant, advisor or rendering
corporate advisory services in relation to such issue management.
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In late 17th and early 18th century Europe, the largest companies of the world was
merchant adventurers. Supported by wealthy groups of people and a network of
overseas trading posts, the collected large amounts of money to finance trade
across parts of the world. For example, The East India Trading Company secured a
Royal Warrant from England, providing the firm with official rights to lucrative
trading activities in India. This company was the forerunner in developing the
crown jewel of the English Empire. The English colony was started by what we
would today call merchant bankers, because of the firm's involvement in financing,
negotiating, and implementing trade transactions. The colonies of other European
countries were started in the same manner. For example, the Dutch merchant
adventurers were active in what are now Indonesia; the French and Portuguese
acted similarly in their respective colonies. The American colonies also represent
the product of merchant banking, as evidenced by the activities of the famous
Hudson Bay Company. One does not typically look at these countries' economic
development as having been fueled by merchant bank adventurers. However, the
colonies and their progress stem from the business of merchant banks, according to
today's accepted sense of the word. Merchant banks, now so called, are in fact the
original "banks". These were invented in the middle Ages by Italian grain
merchants. As the Lombardy merchants and bankers grew in stature on the back of
the Lombard plains cereal crops many of the displaced Jews who had fled
persecution after 613 entered the trade. They brought with them to the grain trade
ancient practices that had grown to normalcy in the middle and far east, along the
Silk Road, for the finance of long distance goods trades.
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The Jews could not hold land in Italy, so they entered the great trading piazzas and
halls of Lombardy, alongside the local traders, and set up their benches to trade in
crops. They had one great advantage over the locals.
Christians were strictly forbidden the sin of usury. The Jewish newcomers, on the
other hand, could lend to farmers against crops in the field, a high-risk loan at what
would have been considered usurious rates by the Church, but did not bind the
Jews. In this way they could secure the grain sale rights against the eventual
harvest. They then began to advance against the delivery of grain shipped to distant
ports. In both cases they made their profit from the present discount against the
future price. This two-handed trade was time consuming and soon there arose a
class of merchants, who were trading grain debt instead of grain.
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During the 20th century, however, European merchant banks expanded their
services. They became increasingly involved in the actual running of the business
for which the transaction was conducted. Today, merchant banks actually own and
run businesses for their own account, and that of others.
Since the 18th century, the term merchant banker has, therefore, been considerably
broadened to include a composite of modern day skills. These skills include those
inherent in an entrepreneur, a management advisor, a commercial and/or
investment banker plus that of a transaction broker. Today a merchant banker is
who has the ability to merchandise -- that is, create or expands a need -- and fulfill
capital requirements. The modern European merchant bank, in many ways, reflects
the early activities and breadth of services of the colonial trading companies.
Most companies that come to a U.S. merchant bank are looking to increase
their financial stability or satisfy a particular, immediate capital need.
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y The main object of merchant banker is to create secondary market for bills
and discount or re-discount bills and acts as an acceptance house.
y Merchant bankers another objective is to set up and provide services for the
venture capital technology funds.
y They also provide services to the finance housing schemes for the
construction of houses and buying of land.
y They render the services like foreign exchange dealer, money exchange, and
authorized dealer and to buy and sell foreign exchange in all lawful ways in
compliance with the relevant laws of India.
y They will invest in buying and selling of transfers, hypothecate and deal
with dispose of shares, stocks, debentures, securities and properties of any
other company.
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As planning and industrial policy of the country envisaged the setting of up of new
industries and technology, greater financial sophistication and financial services
are required. There is a well proven link between economic growth and financial
technology.
Economic development requires specialist financial skills: savings banks to
marshal individual savings; finance companies for consumer lending and mortgage
finance; insurance companies for life and property cover; agricultural banks for
rural development; and a range of specialized government or government
sponsored institutions. As new units have been set up and business is expanding,
they require additional financial services. A public equity or debt issue is the
logical source of fund in this situation and merchant banks can tap this opportunity
of growth.
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Corporate restructuring:
Due to liberalization and globalization Companies are facing lot of competition. In
order to compete, they have to go for restructuring, merger, acquisitions or
disinvestments. They may offer good opportunities to merchant bankers.
The scope could be extended to:1. Advising the company on designing of its Capital Structure.
2. Advising the company on the instrument to be offered to the public.
3. Pricing of the instrument.
4. Advising the company on Legal/ regulatory matters and interaction with SEBI/
ROC/ Stock
5. Exchanges and other regulatory authorities.
6. Assisting the company in marketing the issue.
7. In channelizing the financial surplus of the general public into productive
investment avenues.
8. To coordinate the activities of various intermediaries to the share issue such as
the registrar, Bankers, advertising agency, printers, underwriters, brokers etc.
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In India Merchant Banking activities started from the year 1967, following the
footsteps of similar activities in UK & USA. Currently Merchant Banking activity
has mushroomed in the Indian capital market with both public & private sector
settings up their respective merchant Banking divisions. Currently, the total no. of
merchant bankers in India are approx. 1450 with more than 930 registered with
SEBI. The SEBI authorized Merchant Bankers Include merchant Banking
divisions of All India Financial Institutions, nationalized & foreign banks,
subsidies of the commercial banks, private merchant banks engaged in stock
broking, underwriting activities & financial consultancy & investment advisory
service firms.
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In order to meet the growing demand for broad-based finacial services from the
corporate sector more effectively, the merchant banking division of the nationalise
banks have stated forming independent subsidiaries. These subsidiaries offer more
specialized services with professional expertise & skills. SBI capital market ltd.
Was incorporated as the first such subsidiary of SBI on 2 July, 1986. Then CAN
BANK financial services ltd was set up as wholly owned subsidiary of Canra bank
in 1987. PNB Capital Market was promoted by PNB during Mid 1988. Many more
subsidiaries are being set up by another nationalize banks.
Establishment of SUA:
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DFHI was incorporated as a company under the company act 1956 with an
authorized & paid up capital of Rs 100 crores. Out of this Rs 51 crores has been
contributed by RBI, Rs 16 crores by financial intuitions & 33 crores by public
sector banks. It would also have line of credit from public sector banks; refinance
facility from the RBI in order to meet the working capital requirement. DFHI aims
at providing liquidity in money market as it deals mainly in commercial bills.
CRISIL has been set up in 1987 to provide help to investors, merchant bankers,
underwriters, brokers, banks & financial institutions etc. CRISIL rates various
types of instruments such as debt, Equity, & Fixed return security offered to the
public. It help the investor in taking investment decisions.
SHC was set up in 1986 by the all Indian financial institutions to take care of safe
custody, delivery of shares & collection of sale proceeds of the securities.
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1. Formation of the Business Organization:SEBI act, 1992 does not prescribe any specific form of business organization to
carry on the activities as merchant banker. However, the types of organizations are
listed below:
Sole proprietorship
Partnership firm
Hindu Undivided Family (HUF)
Corporate Enterprises
Co-operative Society
2. Adoption of a viable business plan:All the basic tests required to find out whether the business to be undertaken is
viable or not are also applicable to a Merchant Banking setup. Capital adequacy,
profitability, growth opportunities and current market size are some of the factors
which need to be looked into.
Category I, that is
(i) To carry on any activity of the issue management, which will inter-alia consist
of preparation of prospectus and other information relating to the issue,
determining financial structure, tie-up of financiers and final allotment and refund
of the subscription; and
(ii) To act as adviser, consultant, manager, underwriter, portfolio manager.
Category II, that is, to act as adviser, consultant, co- manager, underwriter,
portfolio manager;
Category III, that is to act as underwriter, adviser, consultant to an issue;
Category IV, that is to act only as adviser or consultant to an issue.
To carry on the activity as underwriter or portfolio manager a separate certificate
of registration needs to be obtained from SEBI.
Consideration of application
The Board shall take into account for considering the grant of a certificate, all
matters, which are relevant to the activities relating to merchant banker and in
particular the applicant complies with the following requirements, namely: 25 | P a g e
y The applicant shall be a body corporate other than a non- banking financial
company
y The merchant banker who has been granted registration by the Reserve Bank
of India to act as a Primary or Satellite dealer may carry on such activity
subject to the condition that it shall not accept or hold public deposit
y The applicant has the necessary infrastructure like adequate office space,
equipments, and manpower to effectively discharge his activities
y The applicant has in his employment minimum of two persons who have the
experience to conduct the business of the merchant banker
y A person directly or indirectly connected with the applicant has not been
granted registration by the Board;
y The applicant fulfils the capital adequacy requirement is as follows:
The capital adequacy requirement should not be less than the net worth of the
person making the application for grant of registration. The net worth shall be as
follows,
Category
Minimum Amount
Category I
Category II
Category III
Category IV
Nil
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y The applicant, his partner, director or principal officer is not involved in any
litigation connected with the securities market which has an adverse bearing
on the business of the applicant and have not at any time been convicted for
any offence involving moral turpitude or has been found guilty of any
economic offence
y The applicant has the professional qualification from an institution
recognized by the Government in finance, law or business management
y Grant of certificate to the applicant is in the interest of investors.
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GUIDELINES OF SEBI
After the obligations of the CCI, the place was occupied by a legal organ called as
Securities and Exchange Board of India. The issue of capital and pricing of
issues by companies has become free of prior approval. The SEBI has issued
guidelines for the issue of capital by the companies. The guidelines broadly covers
the requirement of the first issue by a new or the first issue of a new company set
up by the existing company, the first issue by the existing private companies and
public issues by the existing listing companies. The SEBI is the most powerful
organization to control and lead both the primary market and secondary market.
The SEBI has announced the new guidelines for the disclosures by the
Companies leading to the investor protection. They are presented below:
If any Companys other income exceeds 10 per cent of the total income, the
details should be disclosed.
The Company should disclose any adverse situation which affects the
operations of the Company and occurs within one year prior to the date
filing of the offer document with the Registrar of Companies or Stock
Exchange.
The Company should also disclose the information regarding the capacity
utilization of the plant for the last 3 years.
The Promoters of the Company must maintain their holding at least at 20 per
cent of the expanded capital.
The minimum application money payable should not be less than 25 per cent
of the issue price.
The company should disclose the time normally taken for the disposal of
various types of investors grievances.
The Company can make firm allotments in public issues as follows:
Indian mutual funds (20%),
FIIS (24%),
Regular employees of the company (10%),
Financial institution (20%).
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The Company should disclose the safety net scheme or buy back
arrangements of the shares proposed in public issue. This scheme is
applicable to a limited number of 500 shares per allottee and the offer should
be valid for a period of at least 6 months from the date of dispatch of
securities.
According to the guidelines, in case of the public issues, at least 30
mandatory collection centres should be established.
According to the SEBI guidelines regarding rights issue, the Company
should give advertisements in not less than two news-papers about the
dispatch of letters of offer. No preferential allotment may be made along
with any rights issue.
The Company should also disclose about the fee agreed between the lead
managers and the Company in the memorandum of understanding.
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INVESTMENT BANKING
Both fee-based and fund-based.
Commit their own funds.
MERCHANT BANKING
Purely fee-based.
Impossible to stay aloof from international trends.
COMMERCIAL BANKING
Deals with Debt & Debt related finance.
Asset oriented.
Generally avoid risks.
MERCHANT BANKING
Deals with Equity & Equity related finance.
Management oriented.
Willing to accept risks.
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o Corporate Counseling
Corporate counseling covers the entire field of merchant banking activities viz.
project counseling, capital restructuring, public issue management, loan
syndication, working capital, fixed deposit, lease financing acceptance credit, etc.
Merchant bankers also offer customized solutions to their clients financial
problems.
o Project Counseling
Project counseling includes preparation of project reports, deciding upon the
financing pattern to finance the cost of the project and appraising the project report
with the financial institutions or banks. It also includes filling up of application
forms with relevant information for obtaining funds from financial Institutions and
obtaining government approval.
o Credit Syndication
Merchant bankers arrange to tie up loans for their clients. This takes place in a
series of steps. Firstly they analyses the pattern of the clients cash flows, based on
which the terms of borrowings can be defined. Then the merchant banker prepares
a detailed loan memorandum, which is circulated to various banks and financial
institutions and they are invited to participate in the syndicate.
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After taking action as per SEBI guidelines, the merchant banker arranges a meeting
with company representatives and advertising agents to finalize arrangements
relating to date of opening and closing of issue, registration of prospectus,
launching publicity campaign and fixing date of board meeting to approve and sign
prospectus and pass the necessary resolutions. Pricing of issues is done by the
companies in consultant with the merchant bankers.
o Portfolio Management
Portfolio refers to investment in different kinds of securities such as shares,
debentures or bonds issued by different companies and government securities.
Portfolio management refers to maintaining proper combinations of securities in a
manner that they give maximum return with minimum risk.
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Based on the purpose of business objective, the search of the acquirer company
will start for a merger partner company. If the objective of merger is growth
oriented i.e. seeking expansion in production and market segments, utilization of
existing companies or optimum utilization of resources, then the acquirer company
will select a business related company as a merger partner.
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o Leasing
Is there another lucrative area of financing where merchant bankers are turning?
Leasing is a viable source of financing while acquiring capital assets. The services
include arrangement for lease finance facilities for leasing companies, legal;
documents and tax consultancy.
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Advertising
Printing
Registrars expenses
Stamp duty
In spite of problems popping up, merchant banking in India has vast scope to
develop because of lot of domestic as well as foreign businesses booming here.
Indian economy provides an amicable environment for these firms to set up,
flourish and expand here.
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CASE STUDIES
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Our Mission - To provide Credible, Professional and Customer Focused worldclass investment banking services.
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SBI Group:
The largest commercial bank group in India
Position in the domestic banking sector as on 31 March 2008:
15.44% of the aggregate deposits.
15.28 % of total advances.
The only Indian Bank to find a place in the Fortune Global 500 List.
First Indian Bank to take up merchant banking in 1986.
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Promoters Share: -
Performance:-
SBICAP has built a formidable presence in the area of Project Finance Advisory
and Funds Syndication with several prestigious mandates in almost every sector of
the industry to its credit.
Our product portfolio includes:
Project Appraisal
Structured Finance and Syndication
Infrastructure Project Advisory
Securitisation
Debt & Equity Syndication
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Capital Markets
Capital Markets Group handles transactions in the capital markets space across
multiple instrument structures.
Our product and solutions bouquet includes:
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Take Financial
Service
Nos.
Percentage
Yes
36
45
No
44
55
Total
80
GRAPH
Take Financial Service
45%
1 Yes
2 No
55%
Interpretation
Out of total respondents, 45% respondents have taken Financial Service and rest
55% respondents have not taken the Financial Service.
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Know about
Merchant
Nos.
Percentage
Yes
32
40
No
48
60
Total
80
60
50
1 e , 40
40
1e
30
2o
20
10
0
o.
Interpretation
Out of total respondents, 40% respondents Know about merchant banking and rest
60% respondents dont know about merchant banking.
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Satisfied
Nos.
Percentage
Yes
35
43.75
No
45
56.25
Total
80
100
Percentage,
56.25
60
50
Percentage,
43.75
40
1e
30
2o
20
10
0
Percentage
Interpretation
Out of total respondents, 43.75% respondents Satisfied and rest 60% respondents
dont Satisfied.
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Q4
Sr. no
Bank
Percentage
ICICI
20
SBI
35
PNB
20
BOI
15
Other
10
Interpretation
y Large no. of companies takes financial services from SBI.
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sr.no
Position
Percentage
Good
50
Normal
35
Bad
15
Total
100
Position
Bad
3
15%
No mal
2
35%
Good
1
50%
1 Good
2 ormal
3 Bad
Interpretation
Out of total respondents, 50% respondents Say Good, 35% Say Normal and rest
15% respondents say bad.
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Sr.No
Position
Percentage
Good
40
Normal
55
Bad
Total
100
Position
5%
40%
1 Good
2 ormal
55%
3 Bad
Interpretation
Out of total respondents, 40% respondents Say Good, 55% Say Normal
and rest 5% respondents say bad.
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Q7 What type of security have you deposited/you will deposit with the banks ?
Sr.No.
Type of Security
Nos.
Percentage
1.
18
22.5
2.
Gold
3.
Land Papers
50
62.5
4.
12
15
Total:
80
100
50
45
40
35
30
25
20
15
10
5
0
bank
g ld
land pap
t i dp
bank
gl
land pap
t i dp
50 | P a g e
Satisfaction by Security
Nos.
Percentage
Margin
1.
Yes
64
80
2.
No
16
20
Total:
80
100
70
60
50
40
Yes
No
20
10
0
Yes
No
Interpretation
Out of total respondents, 80% respondents Satisfied and rest 20% respondents
dont Satisfied.
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Depends on M.B
Nos.
Percentage
Yes
56
70
No
24
30
Total
80
100
Depends on
56
1
s
2 No
1
24
No
Nos.
Interpretation
Out of total respondents, 75% respondents Say that They are timely heared and rest
25% say that They are not timely served by merchant banking.
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Difference
Nos.
Percentage
Yes
60
75
No
20
25
Total
80
100
60
50
40
Yes
No
0
20
10
0
Yes
No
Interpretation
Out of total respondents, 75% respondents think that it is differ and rest 25%
respondents dont think so.
Thus I conclude by saying that Merchant Banking business can help banks to
improve their profitability and achieve sustained growth, but for that the
know how and awareness of their features, functions and benefits to the
prospective users should be known; by taking up various measures like
advertisement and other forms of media and campaigns.
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CONCLUSION
The merchant banker plays a vital role in channelizing the financial surplus of the
society into productive investment avenues.
Hence before selecting a merchant banker, one must decide, the services for which
he is being approached. Selecting the right intermediary who has the necessary
skills to meet the requirements of the client will ensure success.
It can be said that this project helped me to understand every details about
Merchant Banking and in future how its going to get emerged in the Indian
economy. Hence, Merchant Banking can be considered as essential financial body
in Indian financial system.
Market development is predicted on a sound, fair and transparent regulatory
framework.
To sustain the growth of the market and crystallize the growing awareness and
interest into an essential, to remove the trading malpractice and structural
inadequacies prevailing in the market, and provide the investors an organized, well
regulated market.
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BIBLIOGRAPHY
Primary Sources:
SBI CAPITAL MARKETS LIMITED- Chief Syndicated Loan ManagerMr. Amit Bansod
Secondary Sources:
y Books:
1. Merchant Banking in India- K C Gupta and Joginder Singh.
2. Merchant Banking In India: Evolution And Emergence, Functions, Rules
And Regulations, Experiences And Challenges- C N Krishna Naik B C
Lakshmanna.
3. Merchant Banking- H R Machiraju.
y Websites:
1. www.google.com/news
2. www.answer.com
3. www.emissarycapital.com
4. www.wikipedia.com
5. www.sebi.gov.in
6. http://unionbankofindia.co.in
7. http://www.asialaw.com/Article/1988860/Merchant-Banking.html
8. http://www.icicisecurities.com
9. http://www.sbicaps.com
10. http://www.bobcapitalmarkets.com
11. http://www.pnbindia.in/subsidiaries
12. http://www.kotaksecurities.com
13. http://www.canmoney.in
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Questionnaire
Respondents Profile
Name
:_______________
Age
:_______________
Gender
:_______________
Occupation :_______________
1. Do you take any financial services from bank?
(a) Yes
(b) NO
(b) No
Yes
(b) No
(b) SBI
(c) PNB
(d) BOI
(e) OTHER(specify)
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(c) Bad
(b) Normal
()
(c) Bad
(b) Normal
()
7. What type of security have you deposited/you will deposit with the banks
(a)Bank security
(b) Gold
(b) No
()
()
(b) No
()
(b) No
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58