Role of merchant banking in managing public issues: an empirical study with special reference to post 1997 era

Abstract

The liberalization and globalization of financial services has brought about drastic changes in primary market and the intermediaries associated with it. Merchant banking is one of the oldest and specialized financial intermediaries in the primary market in India. It is basically a service activity concerned with providing non fund based services of arranging funds for the corporate sector rather than providing funds. Merchant banker as ‘issue manager’ to the capital issues, plan, co-ordinate and control the entire issue activities and direct different intermediaries to contribute to the success of the issue. Issue management by merchant bankers mainly focuses on three basic functions, namely, origination, underwriting and distribution of securities. The present research work has been undertaken with the objective to study the role of merchant banking in the management of public issues with respect to study the rules and regulation of SEBI, to evaluate the performance of merchant bankers, to study the pricing and marketing aspects of public issues. It further makes recommendations to merchant bankers for improving their performance in primary market activities. The research work is based on secondary data and statistical tools have been employed for systematic analysis and for logical interpretation of empirical evidence. The study covers the period of twelve years from 1997-98 to 2008-09. During this period 685 public issues (618 equity with an aggregate of Rs. 1,51,390 crore and 67 debt issues of Rs. 39,125 crore were floated by companies. The equity issues included 546 IPOs and 72 FPOs. In addition to this, the number of rights issues during this period was 330 with an aggregate amount of Rs. 63,624 crore. The performance of Indian and foreign based individual lead merchant bankers has been evaluated in terms of number of issues managed, amount raised, year wise percentage of amount raised and the extent of public issue amount underwritten. Lead merchant bankers play a decisive role in the determination of issue price for public and rights issues. Fairness of issue price determined by the issuer and lead merchant bankers has been measured for all 234 IPOs listed with NSE during the period from 1997-98 to 2006-07. This has been measured by the positive/negative returns obtained by investors during the time interval of first trading day, one week, one month, three months, six months and twelve months from the first trading day. Average return gained by investors from NSE listed IPOs through individual lead merchant bankers has also been measured in this research work. Responsibilities of lead merchant bankers regarding marketing of public issues has been examined in the light of regulatory framework of SEBI and the public response to the equity and debt issues. Annual subscription ratio of public issues of equity shares showed an uneven annual response from the retail investors and by all categories of investors.