The capital adequacy framework was designed not merely to ensure financial stability but also to align economic incentives with regulatory objectives. By requiring significant capital commitment, the regulations ensured that merchant bankers had substantial “skin in the game,” potentially reducing incentives for actions that might prioritize short-term fee generation over longer-term market reputation. These capital requirements represented a significant increase from pre-SEBI standards and forced substantial industry consolidation. Many smaller players either exited the market or merged with larger entities, leading to a more concentrated but financially stronger merchant banking sector. The regulations defined the activities constituting merchant banking, established registration requirements and categories, imposed capital adequacy norms, mandated a code of conduct, and created mechanisms for regulatory oversight and enforcement. Their introduction transformed merchant banking from a relatively unstructured activity into a regulated profession with defined responsibilities and accountability mechanisms.
Category II Merchant Bankers:
Banks play a critical function in both international economy and national economy of a country. The scope and history of banking activities varies widely from nation to another. The current historical analysis paper examines the way banking sector has evolved in Greece, Hellenistic Roman-Egypt, and Rome. Examines various leading players in the Indian merchant banking sector and their contributions to the financial landscape.View Highlights the significance of merchant banks in mobilizing funds, advising corporations, and contributing to economic development.View
These banks follow the cooperative principles of democratic control and shared benefits. Further, a merchant banker to keep registration in force shall pay renewal fee of Rs. 2.5 lakhs every three years from the fourth year from the date of initial registration. To obtain the certificate of registration, one had to apply in the prescribed form and fulfill two sets of norms (i) operational capabilities and (ii) capital adequacy norms. From the point of view of liberalization of the economy, SEBI has taken a retrograde step.
Later, the ICICI set up its merchant banking division in 1973 followed by a number of other commercial banks like Canara Bank, Bank of Broada, Bank of India, Syndicate Bank, Punjab National Bank, Central Bank of India, UCO Bank, etc. The State Bank of India was the first Indian commercial bank to set up a separate merchant banking division in 1972. Explores the historical origins of merchant banking, tracing its development through trade and finance.View This document contains a question bank for the subject of Financial Services with 40 multiple choice questions.
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At present no organisation can act as a ‘merchant banker’ without obtaining a certificate of registration from the SEBI. The origins and establishment of the Neapolitan public banks, which operated between the end of the 16th century and the beginning of the 19th century, are closely connected to the widespread use of credit certificates. At any time, the bank would pay the bearer the equivalent in money (the tantundem and not the eadem res). The credit note turned out to be very useful within the public economy since it served effectively, from the middle of the 16th century, as paper money which had hitherto been unknown. Money circulation in Naples as well as other places in Europe was based on coinage made … In order to understand the various dimensions of banker customer relationship first we have to study the origin and evolution of banking, after which we can understand the changing dimension as per the change in time and situation.
Evolution of Merchant Banking:
JM Financial challenged a SEBI order regarding its underwriting obligations in an issue that faced subscription shortfalls. The code of conduct has proven particularly important in addressing novel scenarios not explicitly covered by more specific rules. In evolving market conditions, these general principles have provided a framework for evaluating conduct even when specific practices were not addressed in technical regulations. Forfaiting is a means of financing used by exporters that enables them to receive cash immediately by selling their medium-term receivables at a discount. Securitization is the financial practice of pooling various types of contractual debt such as………..
- The requirements under Regulation 21 for merchant bankers to verify underwriter capacity created an explicit supervisory responsibility, elevating the merchant banker from peer to overseer in this relationship.
- They play a pivotal role in the capital formation process by helping companies raise funds through equity and debt instruments.
- Prominent examples of Category I merchant bankers include ICICI Securities and SBI Capital Markets.
- They faced tough competition from Persian finance houses who were willing to grant credit to the trade with India.
- Commercial Banks can undertake some of the merchant banking activities like Issue Management whereas Merchant Banking Units cannot undertake commercial banking activities.
SEBI (Merchant Bankers) Regulations 1992: A Comprehensive Analysis
It would also be necessary to make a distinction between merchant banking and commercial banking for a better understanding of the nature of merchant-banking. The merchant banks mainly offer financial services for a fee, while commercial banks accept deposits and grant loans. Prior to the SEBI Merchant Bankers Regulations, merchant banking in India operated with limited formal regulation. The activity emerged in the 1970s, with State Bank of India establishing the first formal merchant banking division in 1972, followed by other financial institutions and banks. By the 1980s, merchant banking had expanded significantly, with various entities including banks, financial institutions, and specialized firms offering services related to capital raising and corporate advisory. Oftentimes, merchant bankers identify assets/undertakings that are being offered for sale, they find potential buyers, negotiate prices and oversee the entire transaction.
Originally intended for the finance of long trading journeys, these methods were now utilized to finance the production of grain. Wraps up the importance of merchant bankers in the financial system and the future outlook for growth and professionalism.View Analyzes recent trends in M&A, challenges due to valuation changes, and growth of major merchant banking players.View
Industry practice has developed standardized due diligence processes including management interviews, site visits, document verification, and independent expert consultations. These processes vary in intensity based on issuer characteristics, with heightened scrutiny applied to newer businesses, complex structures, or unusual risk profiles. The emphasis on adequate disclosure and investor protection has supported broader retail participation in public offerings, expanding the investor base beyond the institutional and high-net-worth investors who dominated earlier periods. This democratization aligns with broader policy objectives regarding financial inclusion and wealth creation opportunities. Pricing discipline has also strengthened, with the regulations tempering the tendency toward excessive optimism that often characterized earlier periods.
Merchant Banking and Financial Services November 2020 MCQ type
The Third Chapter talks about the General Obligations and Responsibilities that a registered Merchant Banker has to undertake. In Post-World War II, Amendments in the Companies Act, 1956 led to the streamlining of the procedure for capital issues and facilitated the growth of capital market in India. Managing agents acquired large share of investible capital initially and later on dispose off the shares once the company gets established. It was found that 600 industrial establishments were managed under the managing agency system in 1951.
The basic objectives of setting up all these institutions was to boost industrial sector, improve capital market, make finance easily available and support the investment climate in the country. These institutions also underwrite the capital issues besides lending support of broking houses. In order to speed up the pace of economic development, efforts were made to channelise the household savings into investment in industry and trade. Significant amendments were made in Companies Act, Capital Issues (Control) Act, Banking Companies Act to regulate the growth of business enterprises. Easy availability of money at the spot from the agency houses had completely eliminated the role of acceptance house or the merchant banking in India.
With over six years of industry experience, our expert and innovative team is dedicated to crafting visually stunning, fully functional websites tailored to meet diverse business needs. Category I To carry on the activity of issue management and to act as adviser, consultant, manager, underwriter, portfolio manager. The Merchant Banking scenario in developed countries like USA and UK are different from Indian Merchant Banking activities. To achieve this performance, a company needs an aggressive marketing plan and advertising effort is the main thrust to such a plan. No marketing plan can be worthwhile unless it formal merchant banking activity in india was originated in is backed by an valuable advertising plan.
Historical Context and Regulatory Background of SEBI (Merchant Bankers) Regulations, 1992
- Legal relationships have similarly evolved, with the regulations driving more structured collaboration between merchant bankers and legal advisors.
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- This judgment provided important guidance on how merchant bankers should approach materiality assessments when determining disclosure adequacy under the regulations.
- Today, merchant banking in India is a highly regulated and structured industry, providing end-to-end financial solutions to corporates and investors alike.
By leveraging their expertise in financial management, merchant banks help companies optimize their capital structure, enhance their market value, and achieve strategic objectives. Today, merchant banking is an integral part of the Indian economy and is important for facilitating corporate finance and capital market transactions. This article will provide an overview of merchant banking in India, its objectives and functions. Merchant Bankers are classified into 4 categories as shown in the above table according to their nature and range of activities and their responsibilities to SEBI, investors and issuers of securities.
Capital Adequacy Norms Under Regulation 7
Merchant banks facilitate mergers and acquisitions, helping companies to expand and consolidate their operations. Category IV merchant bankers provide financial advisory services, such as preparing project reports, advising on mergers and acquisitions, and offering consultancy on restructuring and financial planning. The Securities and Exchange Board of India (SEBI), the regulatory authority for the securities market, governs the operations of merchant bankers.
Commercial banks financed much of the LBO activity of the 1980s.Then, in the mid-1990s; major commercial banks began once again focusing on venture capital, where they had sizeable expertise from their previous exposure to this kind of investment. For example, the Internet search engine Lycos was a 1998 investment of Chase Manhattan’s venture-capital arm. Commercial banks are permitted to report either realized or unrealized gains on their merchant-banking portfolios, as long as they are consistent in the reporting. This option makes it difficult for one to compare different entities’ financial results and could lead to an overly liberal exposure of profits. As they adapt to changing market dynamics, merchant banks will continue to play a critical role in India’s financial ecosystem.
In fact, capital generation is the major aspect of the capital market without which the health and soundness of the financial system cannot be geared and for which well-developed capital market as well as money market is necessary. (1) Corporate financial advice, on such diverse matters as new share and bond issues, capital reconstructions, mergers and acquisitions; A merchant bank may be considered as an institution which centers its operation on all or most of the following activities. New Millennium in India brought a positive impact on economy & society due to Liberalisation Privatisation & Globalisation in the last decade. She has spent a lot of time researching and writing about the ever-changing world of money-making games and websites, making her an expert at finding ways to make money online.