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Merchant Banking
and
Financial Services
Second Edition
About the Authors
Madhu Vij is Professor of Finance at the Faculty of Management Studies, University of Delhi, where
she has been teaching for over three decades. Her professional and teaching interests include the areas
of International Finance, Risk Management, Banking and Financial Services, Corporate Finance and
Accounting. She has received the Alumni Excellence Award from Shri Ram College of Commerce,
University of Delhi. Dr Vij has participated and attended the Global Colloquium on ‘Participant Centered
Learning’ at Harvard Business School, Boston, USA. She was on the Panel of Judges for the award of
PM’s trophy for selecting the best steel plant during 2011–2013 and has also been a member of Ad-hoc
Task Force, Results-Framework Document (2011–2013). Dr Vij has been an Independent Director of
MOIL Limited. Currently, she is an independent director for four private limited companies.
She has published several research papers in international and national journals of repute and has
by national bodies like UGC, RBI, ICSSR, SAIL and Delhi University. She serves on the editorial
board and is also a reviewer for several academic journals, national and international conferences.
Dr Vij is actively involved in research, consultancy and training for several leading public and private
Swati Dhawan is Assistant Professor at the Shri Ram College of Commerce, University of Delhi. She is
a graduate from Shri Ram College of Commerce, a postgraduate from Delhi School of Economics and
PhD from the Faculty of Management Studies, University of Delhi.
She has a rich teaching experience of more than 10 years in the areas of Accounting and Finance in
several colleges of University of Delhi and management institutes of repute like Faculty of Management
Studies, Institute of Management Technology, Lal Bahadur Shastri Institute of Management, etc. She
has several research papers to her credit and has presented papers in several national and international
conferences. Dr Dhawan has also been a resource faculty in management development programmes at
GAIL and Alchemist in the past. She has also worked as a research scholar in several ICSSR sanctioned
examination. In pursuit of her personal training and development, she has successfully completed
curriculum for Living program at Landmark Worldwide.
Merchant Banking
and
Financial Services
Second Edition
Madhu Vij
Professor of Finance
Faculty of Management Studies
University of Delhi
Swati Dhawan
Assistant Professor
Shri Ram College of Commerce
University of Delhi
recording, or otherwise or stored in a database or retrieval system without the prior written permission of the publishers.
The program listings (if any) may be entered, stored and executed in a computer system, but they may not be reproduced for
publication.
This edition can be exported from India only by the publishers,
McGraw Hill Education (India) Private Limited
1 18
Printed and bound in India
Print Edition:
e-Book Edition:
10-3
Information contained in this work has been obtained by McGraw Hill Education (India), from sources believed to be reliable.
However, neither McGraw Hill Education (India) nor its authors guarantee the accuracy or completeness of any information
published herein, and neither McGraw Hill Education (India) nor its authors shall be responsible for any errors, omissions,
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(India) and its authors are supplying information but are not attempting to render engineering or other professional services.
If such services are required, the assistance of an appropriate professional should be sought.
Cover Printer:
Part I
3. Merchant Banking 43
Learning Objectives 43
Merchant Banks 44
Registration of Merchant Bankers with SEBI 45
Merchant Banking and Investment Banking 45
Investment Banks 46
Merchant Banking in India 46
Qualities of Merchant Bankers 47
48
SEBI Regulations for Merchant Banking 49
Red Herring Prospectus (RHP) 53
Summary 56
Key Terms 56
Objective Type Questions 56
Review Questions 57
Critical Thinking Exercise 58
Group Learning Exercise 58
Answers to Objective Questions 58
Case 59
Annexure 1 60
4. Issue Management 62
Learning Objectives 62
Issue Management—Meaning and Processes 63
Different Kinds of Issuses 63
Book Building 69
Eligibility for Registration 71
Types of Investors 72
Applications Supported by Blocked Amount (ASBA) 75
IPO Grading 76
Summary 77
Key Terms 77
Objective Type Questions 77
Review Questions 78
Critical Thinking Exercise 79
Group Learning Exercise 80
Answers to Objective Questions 80
Case 81
Annexure 1 81
Annexure 2 83
5. Depository System 84
Learning Objectives 84
Depository System—An Introduction 85
Contents ix
Part II
Summary 251
Key Terms 252
Objective Type Questions 252
Review Questions 253
Critical Thinking Exercise 254
Group Learning Exercise 254
Research Project 255
Answers to Objective Questions 255
Case 255
Annexure 1 256
Annexure 2 257
Annexure 3 259
11. Leasing and Hire Purchase 262
Learning Objectives 262
What is a Lease? 263
Elements of a Lease Transaction 265
Types of Lease 266
Lease Finance vs Term Loan 270
Hire Purchase 271
272
Limitations of Leasing 274
Evolution and Development of Leasing in India 275
Financial Evaluation of Lease Financing 277
Summary 286
Key Terms 286
Objective Type Questions 286
Review Questions 287
Review Problems 288
Group Learning Exercise 288
Answers to Objective Questions 289
Case 289
Annexure 1 290
12. Non-Banking Finance Companies 292
Learning Objectives 292
293
296
298
301
The Future: Challenges and Opportunities 303
Summary 304
Key Terms 305
Objective Type Questions 305
Contents xiii
Part III
347
Key Players Involved in Authorizing and Settling a Credit Card Transaction 349
Drivers of Growth 351
Concerns 353
Types of Credit Cards 353
Digitalization in India 359
Global Outlook 362
Summary 364
Key Terms 364
Objective Type Questions 364
Review Questions 365
Critical Thinking Exercise 366
Group Learning Exercise 366
Answers to Objective Type Questions 367
Case 367
Annexure 1 367
15. Venture Capital 370
Learning Objectives 370
Venture Capital 371
Venture Capital Financing—Key Advantages 371
Factors Affecting Venture Capital Investment 372
Key Aspects in a Venture Capital Investment 375
How Venture Capitalists Value Business? 380
What Industries do Venture Capitalists Favour? 383
Term Sheet 383
Alternative Investment Funds (AIFs)—SEBI (Alternative Investment Funds)
Regulations, 2012 390
History of Venture Capital Industry 391
Summary 396
Key Terms 396
Objective Type Questions 396
Review Questions 397
Critical Thinking Exercise 398
Group Learning Exercise 398
Answers to Objective Type Questions 399
Case 399
16. Factoring and Forfaiting 400
Learning Objectives 400
Factoring 401
Mechanism of Factoring 403
Types of Factoring 403
How can Factoring Help Companies to Succeed? 405
Contents xv
Part IV
Financial services have become increasingly internationalized over the years. The last 25 years have
witnessed in this sector. How these regulations along with the innovations will have an impact on
is a lesson that policy makers have learnt. Regulatory action has been taken to reduce the adverse
effects of the crisis with renewed focus on prudential regulation, accounting standards and transparency
issues with an aim to prevent another crisis in the future. Accordingly, the second edition represents a
Digitalization in India.
Intended Audience
This text is suitable as a core book for both undergraduate and postgraduate courses at different universities
and other professional institutes across India. It will be of immense use to the students pursuing
MBA, MCom, MBE, and other postgraduate courses. The book is also well suited for professional and
reference, supplementary reading and guide for practicing managers. For someone new to merchant
in the area.
Salient Features
This edition of the book takes the same innovative approach as taken in the previous edition and focuses
on three main blocks: Conceptual understanding, Critical thinking exercise, and Group learning exercise.
The main features of the text are as follows:
incorporated in light of changing contours of Indian banking. Chapter 2 has been rechristened as
segments. Also, latest developments in equity and bond markets have been included. Chapter 3 discusses
at length the importance and need for merchant banking with special emphasis on role of merchant
banker in primary market issue management. Chapter 4 has been updated and explains the nuances
of issue management with a focus on IPOs, Bonus and Rights. Chapter 5 discusses the functions of
the important dimensions of demutualization, insider trading, algo trading and high frequency trading in
this regard apart from taking stock of a regulatory perspective.
to the industry. It analyses the growth of mutual fund industry over years. A new case on direct plans
is also included. Chapter 8 on Insurance has been revised thoroughly to include a separate section on
Health Insurance. It presents the developments in the insurance sector and also discusses the concepts
been extensively revised to include different measures of hedge funds performance. Also, global private
explaining the concept of ETFs. Chapter 10 on Securitization has been updated and revised to include
Risks of Securitization, Limitations of Securitization, Advantages of Securitization – to the issuer,
included. Additional review questions and group learning exercise have also been included. Chapter 11
on Leasing has been thoroughly updated to include the difference between hire purchase and installment
credit and Lease Finance and Term Loans. It also includes Applications of Leasing in Industries, the
Chapter 12 is concerned with the
Part III of the book is devoted to the various details of advisory services in India (Chapters 13–
agencies – SMERA and Brickwork’s rating, discussion on international credit rating agencies with a
focus on Moody’s rating methodology. It discusses the main functions of credit rating agencies and the
Preface to the Second Edition xxi
rating process employed by them – CARE, ICRA and CRISIL. Also the challenges have been outlined
been revised extensively to include the key players involved in authorizing and settling a credit card
transaction, working of credit cards, digitalization in India, reasons for lack of awareness and consumer
Chapter 15 on Venture Capital includes a separate section on SEBI (Alternative Investment Funds)
and Basel accord with a view to gaining an understanding of risk, regulation and adequacy norms.
Risks relevant to Indian banking – Interest Rate Risk, Liquidity Risk, Funding Liquidity and Funding
Liquidity Risk have been discussed in detail. Chapter 20 focusses on Risk Management in Banks and
discusses the risk facing banks in India, namely Liquidity Risk, Interest rate risk, Operational risk and
Chapter 21 on Mergers and Acquisitions has been thoroughly revised to include a separate section
on Buyouts with a detailed discussion on LBOs taking the case of Tata and Tetley. Also, M&A deals
have been illustrated taking popular cases such as Vodafone –Hutchison Essar, Tata Steel – Corus,
Chapter 22 on Micro Finance has been revised to include discussion on Priority Sector Lending
MFIs have been included. A new critical thinking exercise has also been added.
Madhu Vij
Swati Dhawan
Publisher’s Note:
McGraw Hill Education (India) invites suggestions and comments, all of which can be sent to info.india@
mheducation.com (kindly mention the title and author name in the subject line).
Piracy-related issues may also be reported.
Preface to the First Edition
in a well-structured format. It elaborates the basic concepts, functions, regulatory issues and the
contemporary developments in the industry in an easy-to-understand manner. A complete and thorough
The book provides the students with a complete overview of the subject. It deals with all aspects
have become integrated in the last few years, both at the national and international level, even though
not only have to understand the markets but also have to be ahead of the learning curve. The role of
sector reforms as they provide specialist services to the corporate clients. In the last few years, they have
led to further growth of the market. They have emerged as the most critical link between a company
merchant bankers is by far the most diverse, which establishes their relevance in the present economic
has highlighted the importance of prudential regulation, accounting standards and transparency issues.
Intended Audience
This text is suitable as a core book for both undergraduate and postgraduate courses at universities and
other professional institutes. It will be of immense use to the students pursuing MBA, MCom, MBE
and other postgraduate courses. The book is also well suited to professionals and special programmes
of the subject and highlights the changing role and importance of the sector. Chapter 2 discusses the
detail. Chapter 4 provides an overview of the stock exchange in India. It also discusses the important
dimensions of insider trading and the SEBI regulations in this regard.
in India. Chapter 5 discusses the importance and growth of merchant banking and how since the last
management, which has become an important fee-based service with companies in recent years. Chapter
highly lucrative business with more and more banks offering them to their customers in the recent past.
Part III (Chapters 10 to 15) provides the students with a complete understanding of the various facets
expanding economy, especially after the liberalization of the banking and insurance sector over the past
decade. Chapter 10 is concerned with the growth, importance and challenges faced by non-banking
rapidly. Chapter 11 deals with the concept and growth of mutual fund industry in India. This sector has
traditionally been a key player both in collecting domestic savings and also in lending to companies.
micro-insurance, reinsurance and bancassurance. Chapter 13 discusses hedge funds and private equity.
Chapter 14 elaborates the process and structuring of a securitization deal. The recent crisis in the credit
markets has forced analysts and regulators to look into the desirability of certain aspects of securitization
activity. Chapter 15 covers the importance and developments of leasing and hire purchase.
factoring and forfaiting. Chapter 18 explains the concept of mergers and acquisitions and how mergers
are valued.
management models—gap, duration, simulation and value at risk. Chapter 20 explains the Basel 2
Accord and its impact on Indian banks. It discusses the Basel 1 and Basel 2 accords and also the Three
Pillars. Finally, Chapter 21 deals with risk management in banks.
Key Features
Throughout the text, special features have been integrated to encourage the students and help them
xxiv Preface to the First Edition
understand the concepts. A full line of teaching and learning resources developed at the end of
each chapter help the students apply the concepts to real-life situations. The book has the following
pedagogical features:
Each chapter includes Learning Objectives, Opening Case, Summary and Key Terms.
Besides Objective Type Questions and Review Questions, two activities—Group Learning Ex-
ercise and Critical Thinking Exercise have been added at the end of each chapter to promote dis-
cussion and develop critical thinking skills so as to prepare the students for real-world situations.
In the Group Learning Exercise, students are asked to attempt the problem in groups rather than
alone or in pairs. This helps them to foster comfort and familiarity in the group and also develop
a range of communication and learning styles. In Critical Thinking Exercise, the participants are
encouraged to think critically about their experiences, develop their understanding of the related
issues and create a dynamic and innovative learning environment. This helps them to improve
improvement in the book are welcome and will be incorporated in its future editions.
Madhu Vij
Swati Dhawan
Acknowledgements
This book has evolved over a number of years of teaching and doing research at different academic
who has made this book possible. During the writing of this book, we received support from many
friends and colleagues. I would like to express my gratitude to all of them. I am particularly indebted to
Prof Vivek Suneja, Prof Harsh Verma, Prof Pankaj Sinha, Prof Mala Sinha and Dr Anupama Vohra, from
the Faculty of Management Studies, Prof Suvera Gill, University Business School, Chandigarh, Prof P
K Jain and Prof S S Yadav from the Department of Management Studies, IIT Delhi and Prof A M Sherry,
works would have been complete without his constant encouragement and guidance. His beliefs will
always inspire me. My family has always been my inspiration and motivation for continuing to improve
my knowledge and move my career forward. I take this opportunity to convey my sincere thanks to my
husband, Anil Vij. I also thank my wonderful daughter, Anu Priy, her husband, Akshay, my son, Arjun,
his wife, Parul and the youngest addition in our family, Arav Purkayastha. Their continued love and
appreciation is what keeps me motivated.
Madhu Vij
I am indebted to the Almighty God with whose blessings I have been able to conquer another task
in my life. I pronounce with reverence, my deep sense of gratitude to Prof Madhu Vij, for her resolute
guidance and abiding interest throughout the work. A meticulous supervision by her has helped me
enough words that can express my feelings of respect and love for my late grandfather and parents who
left no stone unturned for giving me the best of everything in my life. I owe so immensely to them for
express my feelings for my in-laws for their sustained love, blessings and encouragement in completing
the book. Mere words will never match the quantum of love, affection, inspiration and moral support
that I receive from my daughter, Suhani, and my husband, Vikram who has always stood by me and
reassured my faith in my abilities that made me complete my task.
Swati Dhawan
xxvi Acknowledgements
We are thankful to numerous colleagues who helped us in writing this book. Of great help, were the
reviewers whose detailed comments and advice guided us in revising the text and coming out with the
second edition.
We express our sincere gratitude to all our colleagues from management schools, universities and
professional institutes across India for adopting the book and extending their support and encouragement.
The help and support from everyone at McGraw Hill Education is much appreciated. Special thanks
are due to Mr Piyaray Pandita and Ms Laxmi Singh, who have relentlessly worked to ensure a quality
Madhu Vij
Swati Dhawan
PA RT I
Chapter 1 Financial System, Markets and Services: An Overview
Chapter 2 Financial and Money Markets
Chapter 3 Merchant Banking
Chapter 4 Issue Management
Chapter 5 Depository System
Chapter 6 Broking Services/Stock Exchange
CHAPTER Financial System,
Markets and Services:
1 An Overview
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
LO 1 Know the model of a Financial System
LO 2 Understand the Indian Financial Sector
LO 3 Understand Nature of Financial Services
LO 4 Review the future challenges for the financial services industry
G lobal recovery remains fragile amidst slowdown in trade, rising tendency towards protectionism and
slower growth in productivity. Global financial markets continue to face elevated levels of uncertainty,
notwithstanding the resilience exhibited in overcoming the outcomes of Brexit referendum and the US
presidential elections. While the unconventional monetary policy measures have so far fallen short of achieving
their intended objectives, the systemic central banks in advanced economies are unlikely to end them abruptly
because of the concerns on potential impact on financial stability and limited scope for alternative measures on
fiscal front. However, financial markets would continue to grapple with headwinds from uptick in the interest
rates. In India, domestic macroeconomic conditions remain stable with significant moderation in inflation.
Moreover, reduced policy uncertainty and legislative and tax reforms such as implementation of GST (goods
and services tax) and enactment of bankruptcy laws are expected to reinforce the benefits from the strong
macro fundamentals. The withdrawal of legal tender status of specified bank notes could potentially transform
the domestic economy. While the overall risks to the corporate sector moderated in 2016–17, concerns remain
over its recovery.
4 Merchant Banking and Financial Services
Surplus Deficit
spending Financial Intermediaries spending
units Banks units
Financial institutions
Stock brokers
Sub brokers
Stock exchange
Savers/ Investment banks Borrowers/
Investors/ Regulators Corporates
Households Credit rating agencies
Merchant bankers
`
` `
` `
`
`
Financial System, Markets and Services: An Overview 5
Have
surplus Financial Mint enterprises
funds market (Requires funds)
Ms.
Alka
Invest in form of a
bank recurring deposit
Commercial banks
Differentiated banks
(payment banks
and small banks)
Insurance companies
Others
(pension funds,
primary dealers etc)
Lok
Adalats
Merchant Banking
`
12 Merchant Banking and Financial Services
Globalization
inter
alia
Corporate Governance
16 Merchant Banking and Financial Services
Financial System, Markets and Services: An Overview 17
S
UMMARY
Globalization of the Indian economy has transformed the merchant banking and financial services
sectors in the last decade. In addition, IT has enabled these sectors to attain global standards and
benchmarking to cope with the emerging demands. Merchant bankers have now become the backbone of
modern banking practices because of their vast experience. To sustain any country’s growth, there is need
for skilled professionals who are involved with the activity of transferring funds to those borrowers who are
interested in borrowing. Started in India in 1969, merchant banking in India has gradually helped corporate
bodies, in both private and public sectors to raise significant amount of funds from the capital market for
various purposes. Merchant bankers with their latest skills, updated information, and vast knowledge assist the
companies in raising funds from the market by acting as intermediaries between the issuers of capital and the
ultimate investors who purchase these securities. They promise their clients good return on their investments.
India’s financial services sector is entering a new world and exciting developments are changing the face of
the sector. More than a decade of financial sector reforms has led to a transformation of the sector. The industry
was at a high at the turn of the millennium and all the major financial service providers, like banks and insurance
companies, were showing good performance. With greater liberalization, the financial system had come to play
a much greater role in the allocation of resources than in the past. Just when it was thought that everything
was well, the bubble burst and with it came crashing the hopes of the financial services industry. Added to this
were the various scandals and the sub-prime crisis, and the companies associated with the stock markets were
spurred. In the coming years, financial services will have to prepare themselves to face several challenges and
increase their efficiency, productivity, and competitiveness. Some of the challenges facing the financial sector
are: Globalization, Basel II norms, Asset Liability Management, Risk Management, and Corporate Governance.
KEY TERMS
8. ________________ refers to the ability of a bank to continue its operations when it faces huge amount
of losses.
9. The immediate impact of changes in interest rates is on the _________________.
10. ________________ channelize and mobilize savings from the public into productive investment avenues.
REVIEW QUESTIONS
1. ‘The recent global crisis has shown that the health of a country’s financial sector has far reaching
implications for its economy as well as for other economies.’ Elucidate.
2. Do you think the financial services industry is more volatile than other sectors? Comment.
3. ‘The evolution of regulatory framework for financial sector entities has been intrinsically derived from the
objective of financial stability which has always been an objective for the RBI.’ Comment in the context of
the recent financial sector reforms.
4. Discuss the norms an applicant needs to comply with to be eligible to act as a merchant banker.
5. Define a merchant banker. Why do merchant bankers have a crucial role to play in India? Discuss.
6. Do you think the most important factor shaping the financial services sector, both nationally and
internationally, has been globalization? Comment.
7. ‘The general principles of sound corporate governance should not be applied to all banks, without taking
into account their unique ownership structures.’ Comment in the context of India.
8. Discuss the future challenges faced by the financial services industry in India.
9. Merchant banking is a skill based activity that involves serving the financial need of all clients. Comment.
10. “India’s financial services sector has enjoyed a very strong growth driven mainly by financial sector
liberalization, corporate restructuring, rising personal incomes, and growth of a more consumer-oriented
economy.” Elucidate with examples.
11. Corporate governance is the foundation for effective risk management in banks and, thus, the foundation
for a sound financial system. Discuss.
12. What role do you envisage for the financial services in the coming years?
13. Discuss the emerging scenario of Indian Banking in light of the current challenges and the opportunities
that lie ahead.
Financial System, Markets and Services: An Overview 19
Given the dominance of US financial markets in other developed and developing economies, the sub-prime
mortgage market crisis affected markets and institutions all over the globe. On 27 July 2007, worries about the
sub-prime crisis hit global stock markets and the main Dow Jones stock index lost 4.2% in five sessions—its
worst weekly decline in five years. The fall continued in August.
On 3 August 2007, the Dow Jones Index ended the session almost 2.1% lower. The same day, London’s
main FTSE 100 stock index closed down by 1.2% with French and German markets also declining. On 9 August,
French bank, BNP Paribas, suspended three investment funds worth €2 billion citing problems in the US sub-
prime mortgage sector.
1. Discuss the impact of the US sub-prime crisis on India and China.
2. What has the US sub-prime market crisis got to do with stock markets going haywire in India?
3. What do you think are the lessons for the Indian investor?
Since the start of the financial sector reforms in the 90s, Indian banks have adapted to international practices
and benchmarks. The banking sector has become increasingly susceptible to the vicissitudes of the global
operating environment. With the gradual convergence of domestic markets in India with global ones, the
issue of risk and its management remains an important one. Banks need to critically evaluate their existing risk
management systems and identify the shortcomings so as to devise appropriate strategies to deal with and
manage the risk. Also, banking is, in the ultimate analysis, an exercise in risk management and to the extent
that risks are adequately addressed, the task of proactive management of bank operations can be greatly
enhanced.
Divide the class into groups and discuss the following:
1. How should the financial sector adopt better standards to evaluate the credit-worthiness of potential
borrowers? Suggest various alternatives.
2. Do you think that the risk management strategies adopted by the financial sector is appropriate.
B. True or false
1. True 2. False 3. True 4. False 5. False 6. False 7. False 8. True
9. False 10. True
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It is in the same latitude as southern Canada and the northern
portion of the United States. Its northern limits are about the same as
the northern limits of Quebec. Its southern limits are about the same
as the southern limits of Maryland. It is bounded on the north by the
richest portions of Siberia, which not many years ago was itself a
part of the dominion of the Manchus; for several hundred miles on
the east by the grain-fields of the Ussuri district of Russian Siberia,
also until recently a part of the Chinese Empire; on the east and
south by Korea, over which the world’s next great war will probably
be fought, and soon; on the west by Mongolia, and on the south by
Korea, China, and the gulfs and extensions of the Yellow Sea, which
touches or commands much of that empire. On these gulfs are two
of the finest military and commercial ports of Asia, or the world—Port
Arthur and Talienwan, or, as the Russians call it, Dalny.”
Russian designs upon Manchuria first became prominent after the
Chino-Japanese war when Russia objected to Japan’s acquiring any
territory in that quarter. During the Boxer uprising in 1900 Russian
troops overran Manchuria and in a convention concluded between
Russia and China at the end of the movement, the civil and military
administration of the province was placed practically under the
control of Russia. Owing to objections on the part of the other
powers, however, Russia withdrew this convention and another was
signed in place of it on April 8th, 1902. According to this Manchuria
was to remain “an integral portion of the Chinese Empire”; China
pledged herself to protect the railway and all Russian subjects and
their enterprises in Manchuria, while Russia for her part agreed to
withdraw her troops gradually. This agreement on the part of Russia
remained a promise only. In the meanwhile Manchuria was rapidly
becoming russianised. The important cities along the railway such as
New-Chwang, Mukden, Liauyang and Kirin became centres of
Russian forces. Russian immigrants built and inhabited whole towns
laid out like European cities with all modern improvements. Harbin,
which in 1897 was a collection of mud huts, became a Russian city
and a centre of Manchurian trade.
II
TREATY OF BERLIN, 1878
Her Majesty the Queen of the United Kingdom of Great Britain and
Ireland, Empress of India, His Majesty the Emperor of Germany,
King of Prussia, His Majesty the Emperor of Austria, King of
Bohemia, etc., and King Apostolic of Hungary, the President of the
French Republic, His Majesty the King of Italy, His Majesty the
Emperor of All the Russias and His Majesty the Emperor of the
Ottomans, being desirous to regulate with a view to European order,
conformably to the stipulations of the Treaty of Paris of 30th March,
1856, the questions raised in the East by the events of late years
and by the war terminated by the Preliminary Treaty of San Stefano,
have been unanimously of opinion that the meeting of a Congress
would offer the best means of facilitating an understanding.
[Here follow the names of the ambassadors.]
Who, in accordance with the proposal of the Court of Austria-
Hungary, and on the invitation of the Court of Germany, have met at
Berlin furnished with full powers, which have been found in good and
due form.
An understanding having been happily established between them,
they have agreed to the following stipulations:
Art. 1. Bulgaria is constituted an autonomous and tributary
Principality under the suzerainty of His Imperial Majesty the Sultan; it
will have a Christian government and a national militia.
Art. 2. The Principality of Bulgaria will include the following
territories:
[Here follows a detailed account of boundaries. These having
mainly a technical interest are omitted here and in other articles of
the treaty of the same nature. Those articles likewise whose
importance is purely local are given in abbreviated form.]
This delimitation shall be fixed on the spot by the European
Commission, on which the Signatory Powers shall be represented. It
is understood: 1. That this Commission will take into consideration
the necessity for His Imperial Majesty the Sultan to be able to defend
the Balkan frontier of Eastern Rumelia. 2. That no fortifications may
be erected within a radius of 10 kilometres from Samakov.
Art. 3. The Prince of Bulgaria shall be freely elected by the
population and confirmed by the Sublime Porte, with the assent of
the Powers. No member of the Reigning Dynasties of the Great
European Powers may be elected Prince of Bulgaria. In case of a
vacancy in the princely dignity the election of a new Prince shall take
place under the same conditions and with the same forms.
Art. 4. An Assembly of Notables of Bulgaria convoked at Tirnovo,
shall, before the election of the Prince, draw up the Organic Law of
the Principality. In the districts where Bulgarians are intermixed with
Turkish, Rumanian, Greek or other populations, the rights and
intents of these populations shall be taken into consideration as
regards the elections and the drawing up of the Organic Law.
Art. 5. Differences of religious creed not to be a bar to office
holding in Bulgaria. Complete freedom of worship assured.
Art. 6. The provisional administration of Bulgaria.
Art. 7. The provisional régime shall not be prolonged beyond a
period of nine months from the exchange of the ratifications of the
present Treaty. When the Organic Law is completed the election of
the Prince of Bulgaria shall be proceeded with immediately. As soon
as the Prince shall have been installed, the new organisation shall
be put into force, and the Principality shall enter into the full
enjoyment of its autonomy.
Art. 8. The treaties of commerce and navigation as well as all
conventions and arrangements concluded between Foreign Powers
and the Porte, and now in force are maintained in the Principality of
Bulgaria, and no change shall be made in them with regard to any
Power without its previous consent. No transit duties shall be levied
in Bulgaria on goods passing through that principality. The subjects
and citizens of commerce of all the powers shall be treated in the
principality on a footing of strict equality. The immunities and
privileges of foreigners, as well as the rights of consular jurisdiction
and protection as established by the capitulations and usages, shall
remain in full force so long as they shall not have been modified with
the consent of the parties concerned.
Art. 9. Tribute to be paid by Bulgaria to suzerain court, etc.
Art. 10. Railway questions in Bulgaria.
Art. 11. Evacuation and demolition of Bulgarian fortresses.
Art. 12. Land rights of non-resident Moslems and others.
Commission to settle questions of state property. Bulgarians
travelling in Turkey subject to Ottoman laws.
Art. 13. A province is formed south of the Balkans which will take
the name of “Eastern Rumelia,” and will remain under the direct
political and military authority of His Imperial Majesty, the Sultan,
under conditions of administrative autonomy. It shall have a Christian
Governor-General.
Art. 14. Boundaries of Eastern Rumelia.
Art. 15. His Majesty, the Sultan, shall have the right of providing for
the defence of the land and sea frontiers of the province by erecting
fortifications on those frontiers and maintaining troops there. Internal
order is maintained in Eastern Rumelia by a native gendarmerie
assisted by a local militia. In forming these corps, the officers of
which are nominated by the Sultan, regard shall be paid in the
different localities to the religion of the inhabitants.
His Imperial Majesty, the Sultan, undertakes not to employ
irregular troops, such as Bashi-Bazouks and Circassians, in the
garrisons of the frontiers. The regular troops detailed for this service
must not in any case be billeted on the inhabitants. When they pass
through the province they shall not make a stay there.
Art. 16. The governor-general shall have the right of summoning
the Ottoman troops in the event of the internal or external security of
the province being threatened. In such an eventuality the Sublime
Porte shall inform the representatives of the Powers at
Constantinople of such a decision, as well as of the exigencies which
justify it.
Art. 17. The governor-general of Eastern Rumelia shall be
nominated by the Sublime Porte, with the assent of the Powers for a
term of five years.
Arts. 18 and 19. Creating a European commission for the
organisation of Eastern Rumelia.
Arts. 20 and 21. Concerning foreign relations, religious liberty and
railway administration of Eastern Rumelia.
Art. 22. Regulations concerning Russian occupation of Bulgaria
and Eastern Rumelia. Evacuation of Rumania.
Art. 23. The Sublime Porte undertakes scrupulously to apply, in
the Island of Crete the Organic Law of 1868 with such modifications
as may be considered equitable. Similar laws adapted to local
requirements, excepting as regards the exemption from taxation
granted to Crete shall also be introduced into the other parts of
Turkey in Europe, for which no such organisation has been provided
by the present Treaty. The Sublime Porte shall depute special
Commissions, in which the native element shall be largely
represented, to settle the details of the new laws in each province.
The schemes of organisation resulting from these labours shall be
submitted for examination to the Sublime Porte, which, before
promulgating the Acts for putting them into force, shall consult the
European Commission instituted for Eastern Rumelia.