Unit 1: Financial services & merchant banking
Management of Financial Services notes · PTU syllabus (BCOP 612-18)
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Unit summary
Financial services connect savers, borrowers and investors. This unit covers the meaning, features and importance of financial services, their contribution to industry and the service sector, the origin and growth of merchant banking in India, the scope of merchant banking services, and the management of public issues.
After this unit you can
- Define financial services and explain their features and importance
- Explain the contribution of financial services to industry and the service sector
- Trace the growth of merchant banking in India and its services
- Explain the management of public issues by merchant bankers
PTU syllabus topics
- Meaning
- features and importance of financial services
- contribution to industry and the service sector
- origin and growth of merchant banking in India
- scope of merchant banking services
- management of public issues
Due diligence
Checks company records
Offer document
Prepares the prospectus
Pricing
Book building and price band
Marketing
Roadshows and investor outreach
Post-issue
Allotment and listing
Topic 1
Meaning, features and importance of financial services
Financial services are activities, benefits and satisfactions connected with the sale of money that offer users and customers a financial benefit — services provided by banks, NBFCs, insurers, mutual funds, brokers and other intermediaries.
Fund-based
Leasing, hire purchase, bill discounting, venture capital, factoring, housing finance, consumer credit, insurance
Fee-based (advisory)
Merchant banking, issue management, portfolio management, credit rating, underwriting, stock broking, M&A advisory, depository services
- Features: intangible, customer-oriented, inseparable (produced and consumed together), perishable, dynamic, people-intensive, regulated, information-based.
- Importance: mobilise savings, allocate funds to productive uses, spread and transfer risk, promote investment and growth, specialisation, financial inclusion, efficient payments.
Topic 2
Contribution to industry and the service sector
- Industry: term finance, working capital, leasing of equipment, venture capital for start-ups, factoring for MSMEs, capital-market access through merchant bankers.
- Service sector: financial services are themselves a large part of services GDP; they create employment (banking, insurance, fintech) and support trade, real estate and consumption (consumer finance).
- Economic development: capital formation, balanced regional growth, export promotion (export credit and insurance), infrastructure financing (InvITs, NaBFID).
- Fintech era: UPI, digital lending, robo-advisory, InsurTech, Account Aggregator framework — expanding reach and lowering cost.
Topic 3
Merchant banking: origin and growth in India
Merchant banking is a fee-based service of managing and underwriting new issues, advising companies on raising capital, mergers, restructuring and project finance. SEBI (Merchant Bankers) Regulations, 1992 define a merchant banker as any person engaged in issue management by making arrangements for selling, buying or subscribing to securities, or acting as manager, consultant or adviser.
- 1
1967
Grindlays Bank started a merchant banking division
- 2
1969–1972
Citibank, SBI (1972) and ICICI (1973) followed
- 3
1980s
Growth with the boom in public issues
- 4
1992
SEBI regulations; CCI abolished — free pricing of issues
- 5
2000s
Book building, global depository receipts, M&A advisory
- 6
2020s
Record IPO activity; SME IPOs; QIPs and REITs
- Registration: SEBI-registered merchant bankers must meet minimum net worth and staffing norms; the 2024 amendments created two categories (Category I may handle main-board issues) with higher net-worth requirements.
Topic 4
Scope of merchant banking services
Issue management
IPOs, FPOs, rights issues, QIPs, buy-backs
Corporate counselling
Business strategy, restructuring
Project counselling and loan syndication
Feasibility reports, arranging loans
Underwriting
Guaranteeing subscription
Portfolio management
Managing investments for clients
M&A advisory
Valuation, negotiation, open offers
Capital restructuring
Debt and equity mix
International finance
ADRs, GDRs, ECBs, foreign listings
Non-resident investment advice
NRI and FPI services
Topic 5
Management of public issues
- 1
Appointment of lead managers (merchant bankers)
- 2
Due diligence and drafting
Draft Red Herring Prospectus (DRHP) filed with SEBI and exchanges
- 3
SEBI observations
- 4
Appointment of intermediaries
Registrar, bankers, underwriters, syndicate members, ad agency
- 5
Marketing
Roadshows, anchor investors (allotted a day before opening)
- 6
Price band and RHP filing with ROC
- 7
Issue open (3–10 working days)
Bids via ASBA/UPI
- 8
Basis of allotment
Finalised with the stock exchange
- 9
Listing
T+3 days from issue closure
- Pricing: fixed price or book building (price band with a cap not more than 120% of the floor; investors bid; price discovered).
- Investor categories (book built issues): QIBs up to 50%, non-institutional investors at least 15%, retail individual investors at least 35% (for profitable companies).
- Obligations of the lead manager: due diligence certificate, ensure disclosures as per SEBI ICDR Regulations, 2018; monitor post-issue activities (refunds, allotment, listing); ensure minimum subscription of 90%.
- Green-shoe option: stabilising agent may over-allot up to 15% to stabilise post-listing prices.
Exam tip
Mention that SEBI cut the listing timeline to T+3 (from T+6) in 2023 — a recent change examiners appreciate.
Key terms
- Financial services
- Services connected with mobilising and allocating funds and managing risk
- Fund-based service
- Service where the provider deploys its own funds
- Merchant banker
- SEBI-registered intermediary managing issues and advising on capital
- Book building
- Price discovery through bids within a price band
- Green-shoe option
- Over-allotment option for price stabilisation after listing
Quick revision
- Fund-based vs fee-based financial services.
- Features: intangible, customer-oriented, regulated.
- Merchant banking: Grindlays 1967; SEBI regulations 1992.
- Services: issue management, underwriting, syndication, M&A, portfolio management.
- IPO: DRHP → SEBI → RHP → bidding → allotment → listing at T+3.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.Define financial services.
- Q2.Distinguish fund-based and fee-based services.
- Q3.What is merchant banking?
- Q4.What is a DRHP?
- Q5.What is book building?
- Q6.What is a green-shoe option?
Long-answer questions
- Q1.Explain the meaning, features, classification and importance of financial services.
- Q2.Trace the origin and growth of merchant banking in India.
- Q3.Explain the services offered by merchant bankers.
- Q4.Explain the role of merchant bankers in the management of public issues.
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