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Unit 12: Merchant Banking and Venture Capital

make them acceptable to investors under prevailing preferences and market conditions, and at Notes
the same time afford the borrowing company, flexibility and freedom that it needs to meet
possible future contingencies. They guarantee the success of issues by underwriting them. They
also provide all the services related to receiving applications, allotment, collecting money,
sending share certificates and so on.
The merchant banker normally does not assume all the risk himself while underwriting the
issue. Merchant banks offer services also to investors. The range of activities offered by merchant
banks is much wider than sponsoring public issues of industrial securities. They offer project
finance, syndication of credit, corporate advisory services, mutual fund investments, investment
management etc. Let us go through the most important services of Merchant Banks.
1. Project Counselling: Project counselling 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.
2. Issue Management: Management of issue involves marketing of corporate securities viz.
equity shares, preference shares and debentures or bonds by offering them to public.
Merchant banks act as an intermediary whose main job is to transfer capital from those
who own it to those who need it. After taking action as per SEBI guidelines, the merchant
banker arranges a meeting with company representatives and advertising agents to finalise
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.
3. Underwriting of Public Issue: Underwriting is a guarantee given by the underwriter that
in the event of under subscription, the amount underwritten would be subscribed by him.
Banks/Merchant banking subsidiaries cannot underwrite more than 15% of any issue.
4. Managers, Consultants or Advisers to the Issue: The managers to the issue assist in the
drafting of prospectus, application forms and completion of formalities under the
Companies Act, appointment of Registrar for dealing with share applications and transfer
and listing of shares of the company on the stock exchange. Companies can appoint one or
more agencies as managers to the issue.
5. 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.

6. Advisory Service Relating to Mergers and Takeovers: A merger is a combination of two
companies into a single company where one survives and other loses its corporate existence.
A takeover is the purchase by one company acquiring controlling interest in the share
capital of another existing company. Merchant bankers are the middlemen in setting
negotiation between the two companies.

7. Off Shore Finance: The merchant bankers help their clients in the following areas involving
foreign currency:
(a) Long term foreign currency loans

(b) Joint Ventures abroad
(c) Financing exports and imports
(d) Foreign collaboration arrangements

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