Evolution of investment banking in India

The origin of investment banking in India can be traced back to the 19th
century when European merchant banks set-up their agency houses in the
country to assist in the setting of new projects. In the early 20th century, large
business houses followed suit by establishing managing agencies which
acted as issue house for securities, promoters for new projects and also
provided finance to Greenfield ventures. The peculiar feature of these
agencies was that their services were restricted only to the companies of the
group to which they belonged. A few small brokers also started rendering
Merchant banking services, but theirs was limited due to their small capital
base.

In 1967, ANZ Grindlays bank set - up a separate merchant banking division

to handle new capital issues. It was soon followed by Citibank, which started
rendering these services. The foreign banks monopolized merchant banking
services in the country. The banking committee, in its report in 1972, took
note of this with concern and recommended setting up of merchant banking
institutions by commercial banks and financial intuitions. State bank of India
ventured into this business by starting a merchant banking bureau in 1972.
In 1972, ICICI became the first financial institution to offer merchant
banking services. JM finance was set-up by Mr. Nimesh Kampani as an
exclusive merchant bank in 1973. The growth of the industry was very slow
during this period. By 1980, the number of merchant banks rose to 33 and
was set-up by commercial banks, financial institutions and private sector.
The capital market witnessed some buoyancy in the late eighties. The advent
of economic reforms in 1991 resulted in sudden spurt in both the primary
and secondary market. Several new players entered into the field. The
securities scam in may, 1992 was a major set back to the industry. Several
leading merchant bankers, both in public and private sector were found to be
involved in various irregularities. Some of the prominent public sector
players involved in the scam were Can bank financial services, SBI capital
markets, Andhra bank financial services, etc. leading private sector players
involved in the scam included Fairgrowth financial services and Champaklal
investments and finance (CIFCO).

The market turned bullish again in the end of 1993 after the tainted shares
problem was substantially resolved. There was a phenomenal surge of
activity in the primary market. The registration norms with the SEBI were
quite liberal. The low entry barriers coupled with lucrative opportunities
lured many new entrants into this industry. Most of the new entrants were
undercapitalized with little or no expertise in merchant banking. These
players could hardly afford to be discerning and started offering their
services to all and sundry clients. The market was soon flooded with poor
quality paper issued by companies of dubious credentials. The huge losses
suffered by investors in these securities resulted in total loss of confidence in
the market. Most of the subsequent issues started failing and companies
started deferring their plans to access primary markets. Lack of business
resulted in a major shake out in the industry. Most of the small firms exited
from the business. Many foreign investment banks started entering Indian
markets. These firms had a huge capital base, global distribution capacity
and expertise. However, they were new to Indian markets and lacked local
penetration. Many of the top rung Indian merchant banks, who had string
domestic base, started entering into joint ventures with the foreign banks.
This energy resulted in synergies as their individual strength complemented
each other.

Investment bankers

Investment bankers play an important role in the issue management process.

Lead managers (category I merchant bankers) have to ensure correctness of
the information furnished in the offer document. They have to ensure
compliance with SEBI rules and regulations as also guidelines for
disclosures and investor protection. To this effect, they are required to
submit to SEBI a due diligence certificate conforming that the disclosures
made in the draft prospectus or letter of offer are true, fair and adequate to
enable the prospective investors to make a well informed investment
decision. The role of merchant bankers in performing their due diligence
functions has become even more important with the strengthening of the
disclosure requirements and with the SEBI giving up the vetting up of
prospectus. SEBIs various operational guidelines issued during the year to
merchant bankers primarily addressed the need to enhance the standard of
disclosures.
It was felt that a further strengthening of the criteria for registration of
merchant bankers was necessary, primarily through an increase in the net
worth requirements, so that the capital would be commensurate with the
level of activities undertaken by them. With this in view, the net worth
requirement or category I merchant bankers was raised in 1995-96 to Rs.5
crore. In 1996-96, the SEBI (merchant bankers) regulations, 1992 were
amended to require the payment of fees for each letter of offer or draft
prospectus that is filed with SEBI.

Underwriters

Underwriters are required to register with SEBI in terms of the EBI

(Underwriters) Rules and Regulations, 1993. In addition to underwriters
registered with SEBI in terms of these regulations, all registered merchant
bankers in categories I, II and III and stock brokers and mutual funds
registered with SEBI can function as underwriters.